basic financial statements and required … financial statements and required supplementary...

UNIVERSITY OF WISCONSIN HOSPITALS

AND CLINICS AUTHORITY

Basic Financial Statements and

Required Supplementary Information

June 30, 2014 and 2013

(With Independent Auditors’ Report Thereon)



Table of Contents

Page(s)

Independent Auditors’ Report 1–2

Management’s Discussion and Analysis 3–16

Basic Financial Statements:

Statements of Net Position as of June 30, 2014 and 2013 17–18

Statements of Revenues, Expenses, and Changes in Net Position for the years ended June 30,

2014 and 2013 19

Statements of Cash Flows for the years ended June 30, 2014 and 2013 20–21

Notes to Basic Financial Statements 22–52


Schedule of Plan Funding Progress as of June 30, 2014 53

Independent Auditors’ Report

The Board of Directors

University of Wisconsin Hospitals

and Clinics Authority:

Report on the Financial Statements

We have audited the accompanying financial statements of the University of Wisconsin Hospitals and

Clinics Authority (the Hospital), a component unit of the State of Wisconsin, as of and for the years ended

June 30, 2014 and 2013, and the related notes to the financial statements, which collectively comprise the

Hospital’s basic financial statements as listed in the table of contents.

Management’s Responsibility for the Financial Statements

Management is responsible for the preparation and fair presentation of these financial statements in

accordance with accounting principles generally accepted in the United States of America; this includes the

design, implementation, and maintenance of internal control relevant to the preparation and fair

presentation of financial statements that are free from material misstatement, whether due to fraud or error.

Auditors’ Responsibility

Our responsibility is to express an opinion on these financial statements based on our audits. We conducted

our audits in accordance with auditing standards generally accepted in the United States of America and

the standards applicable to financial audits contained in Government Auditing Standards, issued by the

Comptroller General of the United States. Those standards require that we plan and perform the audit to

obtain reasonable assurance about whether the financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the

financial statements. The procedures selected depend on the auditors’ judgment, including the assessment

of the risks of material misstatement of the financial statements, whether due to fraud or error. In making

those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair

presentation of the financial statements in order to design audit procedures that are appropriate in the

circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal

control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of

accounting policies used and the reasonableness of significant accounting estimates made by management,

as well as evaluating the overall presentation of the financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our

audit opinion.

Opinion

In our opinion, the financial statements referred to above present fairly, in all material respects, the

financial position of the University of Wisconsin Hospitals and Clinics Authority as of June 30, 2014 and

KPMG LLP Suite 900 10 South Broadway St. Louis, MO 63102-1761

KPMG LLP is a Delaware limited liability partnership, the U.S. member firm of KPMG International Cooperative (“KPMG International”), a Swiss entity.

2

2013, and the changes in financial position and cash flows for the years then ended, in accordance with

accounting principles generally accepted in the United States of America.

Other Matter


U.S. generally accepted accounting principles require that management’s discussion and analysis on

pages 3-16 and the schedule of plan funding progress on page 53 be presented to supplement the basic

financial statements. Such information, although not a part of the basic financial statements, is required by

the Governmental Accounting Standards Board who considers it to be an essential part of financial

reporting for placing the basic financial statements in an appropriate operational, economic, or historical

context. We have applied certain limited procedures to the required supplementary information in

accordance with auditing standards generally accepted in the United States of America, which consisted of

inquiries of management about the methods of preparing the information and comparing the information

for consistency with management’s responses to our inquiries, the basic financial statements, and other

knowledge we obtained during our audits of the basic financial statements. We do not express an opinion

or provide any assurance on the information because the limited procedures do not provide us with

sufficient evidence to express an opinion or provide any assurance.

Other Reporting Required by Government Auditing Standards

In accordance with Government Auditing Standards, we have also issued our report dated October 9, 2014

on our consideration of the Hospital’s internal control over financial reporting and on our tests of its

compliance with certain provisions of laws, regulations, contracts, and grant agreements and other matters.

The purpose of that report is to describe the scope of our testing of internal control over financial reporting

and compliance and the results of that testing, and not to provide an opinion on internal control over

financial reporting or on compliance. That report is an integral part of an audit performed in accordance

with Government Auditing Standards in considering the Hospital’s internal control over financial reporting

and compliance.

St. Louis, Missouri

October 9, 2014



Management’s Discussion and Analysis

June 30, 2014 and 2013

3 (Continued)

This section of the annual financial report for the University of Wisconsin Hospitals and Clinics Authority

(the Hospital) presents management’s analysis of the Hospital’s performance during the fiscal years that ended

on June 30, 2014 and 2013, and is designed to focus on the current fiscal year activity, resulting changes, and

currently known facts; therefore, please read it in conjunction with the Hospital’s financial statements.

Overview of the Financial Statements

This discussion and analysis is intended to serve as an introduction to the Hospital’s financial statements, and the

notes to the financial statements.

The statements of net position and the statements of revenues, expenses, and changes in net position, and cash

flows, reported on the accrual basis, provide an indication of the Hospital’s financial health. The statements of

net position include all of the Hospital’s assets, deferred outflows of resources, and liabilities, as well as an

indication about which assets can be utilized for general purposes and which are restricted by external donors or

for other purposes. The statements of revenues, expenses, and changes in net position report all of the revenues

and expenses during the period indicated. The statements of cash flows report the cash provided and used by

operating activities, as well as other cash sources such as investment income and other cash uses, such as

repayment of bonds and capital additions. The notes to financial statements provide additional information that is

essential to a full understanding of the data provided in the financial statements.

Financial Highlights – Fiscal Year 2014

The Hospital’s net position increased by approximately $108.1 million.

Net patient service revenues increased by $94.4 million, or 7.7%. Total operating revenues increased by

$96.1 million, or 7.6%, and total operating expenses increased by $111.2 million, or 9.7%.

Operating income for the year was $93.6 million.

Total nonoperating revenue (expense) increased by a net amount of $34.5 million or 142.3%. The more

significant components of this net change are favorable investment experience and a decrease in payments

to the University of Wisconsin School of Medicine and Public Health (UWSMPH).

The excess of revenues over expenses before capital grants, gifts and donations and additions to permanent

endowments increased $19.4 million or 23.0%.

Financial Highlights – Fiscal Year 2013

The Hospital’s net position increased by approximately $87.0 million.

Net patient service revenues increased by $51.6 million, or 4.4%. Total operating revenues increased by

$56.7 million, or 4.7%, and total operating expenses increased by $75.2 million, or 7.0%.

Operating income for the year was $108.6 million.

Total nonoperating revenue (expense) increased by a net amount of $1.4 million or 5.6%. The more

significant components of this net change are a decrease in interest expense, favorable investment and




June 30, 2014 and 2013

4 (Continued)

interest rate swap experience and an increase in payments to the University of Wisconsin School of

Medicine and Public Health (UWSMPH).

The excess of revenues over expenses before capital grants, gifts and donations and additions to permanent

endowments decreased $17.1 million or 16.8%.

Hospital Highlights – Fiscal Year 2014

The Hospital is ranked the top hospital in the state for the third consecutive year, is among the nation’s top

50 hospitals in nine medical specialties for the second year in a row, and ranked as high-performing in

three additional specialty areas in the U.S. News and World Report America’s Best Hospitals 2014-2015.

American Family Children’s Hospital was again ranked among the nation’s top 50 pediatric hospitals in

four medical and surgical specialties.

In January 2014, the AFCH became the first children’s hospital in the world to offer new lower-dose

radiation technology with the opening of an imaging pavilion and multi-specialty pediatric hybrid suite,

including space for catheterization, angioplasty and operating rooms.

In February 2014, the Hospital was redesignated as a Magnet Nursing organization. Magnet is the highest

and most prestigious credential a health care organization can achieve for nursing excellence and quality

patient care. Fewer than 7% of all registered hospitals in the United States receive Magnet designation or

re-designation, including only 10 in Wisconsin.

On April 29, 2014, the entities of UW Health and SwedishAmerican Health System in Rockford, IL

approved a letter of intent by which SwedishAmerican will merge with UW Health system. The formal

affiliation that UW Health has had with SwedishAmerican since 2010 led to the development of the new

SwedishAmerican Regional Cancer Center that opened to patients in October 2013.

In May 2014, the Hospital opened a 14-bed state-of-the-art Level IV Neonatal Intensive Care Unit (NICU)

at the American Family Children’s Hospital (AFCH), which is only one of two Level IV NICUs in the

state. The unit provides services to premature and full-term neonatal infants requiring complex surgical

interventions and/or subspecialty medical care.

Also in May 2014, the Hospital opened a 12-bed Pediatric Universal Care Unit at AFCH, which includes

rooms to serve children whose needs are higher than those of a general care unit, but not as acute as those

in the Pediatric Intensive Care Unit (PICU).

In June 2014, the Hospital opened a new autopsy suite and morgue, which will provide a modern space for

pathology learning and autopsies.

Hospital Highlights – Fiscal Year 2013

The Hospital is ranked the top hospital in the state for the second consecutive year, is among the nation’s

top 50 hospitals in nine medical specialties, and ranked as high-performing in four additional specialty

areas in the U.S. News and World Report America’s Best Hospitals 2013-2014. American Family




June 30, 2014 and 2013

5 (Continued)

Children’s Hospital was again ranked among the nation’s top 50 pediatric hospitals, this time in six

medical and surgical specialties.

On December 28, 2012, the Hospital formed a new company, the Inntowner LLC, and purchased the

Madison Best Western Inntowner Hotel. The hotel will provide a housing option for regional patients prior

to and following their hospital stay, including those who need to remain in proximity to the Hospital for

post-discharge care.

In March 2013, the Hospital issued $272,595,000 of Hospital Revenue Bonds, Series 2013A. The bond

proceeds are designated to finance qualified capital projects and to refund a portion of the outstanding

Series 2008A Bonds and Series 2009B Bonds, the remainder of the Series 2009C Bonds and a partial

termination of the Series 2009B interest rate swap agreement. The capital projects include a new

comprehensive acute and ambulatory care facility on the east side of Madison, construction and equipment

of a two-story addition to the American Family Children’s Hospital and construction and equipping of a

new autopsy and pathology suite. Those projects are under way and are scheduled for completion at

various dates through 2015.

In March 2013, Moody’s Investor Services upgraded the hospital’s rating on outstanding rated debt from

A1 to Aa3 with a stable outlook.

In April 2013, the Hospital opened the UW Health Digestive Health Center (DHC) on Madison’s near west

side. The opening of the DHC created the region’s finest multi-disciplinary outpatient clinic serving

patients with diseases of the digestive tract, liver and pancreas.

The Hospital receives certain administrative and other general services from the University of Wisconsin

and provides direct financial support for educational, research and clinical activities of the University

through an Affiliation Agreement. In addition to the historic Affiliation Agreement transfers, the Hospital

board of directors approved in fiscal year 2013 the provisions of an Annual Academic Advancement

Agreement (AAA) to establish guidelines as to when the Hospital will provide additional financial support

for the education/clinical programs and outcomes research associated with UWSMPH. Under the AAA, if

the operating margin of the Hospital for any fiscal year exceeds a defined threshold, initially established as

5%, and days cash-on-hand exceeds a defined threshold, initially established as 180 days, the Hospital will

make a distribution to UWSMPH. Included in nonoperating expense and accrued expenses is $35,639,000

representing the expected payment for the 2013 fiscal year.

The Hospital was one of the first in the Upper Midwest and in the first group in the nation to receive the

Comprehensive Stroke Center Certification from The Joint Commission and the American Heart

Association/American Stroke Association in November 2012.

In August 2012, the Hospital formed, along with the University of Wisconsin Medical Foundation, a new

entity known as UW Health Accountable Care Organization, Inc. As of January 1, 2013, the organization

became one of approximately 250 across the country awarded the opportunity to participate in the

Medicare Shared Savings Program (MSSP). The ACO MSSP participant organizations coordinate care for

assigned Medicare beneficiaries and have an opportunity to receive incentive payments for identifiable

share cost savings.




June 30, 2014 and 2013

6 (Continued)

Financial Analysis and Results of Operations

At June 30, 2014, the Hospital’s assets exceeded liabilities by $969.9 million, which is an increase in total net

position of $108.1 million, or 12.5%, from the prior fiscal year-end.

At June 30, 2013, the Hospital’s assets exceeded liabilities by $861.8 million, which is an increase in total net

position of $87.0 million, or 11.2%, from the prior fiscal year-end.

Table 1 summarizes assets, deferred outflows of resources, liabilities, and net position at June 30 (in thousands):

Table 1Net Position

June 30, Dollar Percentage2014 2013 change change

Current and other assets $ 1,145,159 1,191,636 (46,477) (3.9)%Capital assets 609,117 455,283 153,834 33.8

Total assets 1,754,276 1,646,919 107,357 6.5

Deferred outflows of resources 16,745 18,560 (1,815) (9.8)

Total assets anddeferred outflows ofresources $ 1,771,021 1,665,479 105,542 6.3

Long-term debt $ 468,045 483,789 (15,744) (3.3)Other liabilities 333,105 319,871 13,234 4.1

Total liabilities 801,150 803,660 (2,510) (0.3)

Net position:Net investment in capital assets 283,267 197,200 86,067 43.6Restricted 10,760 15,998 (5,238) (32.7)Unrestricted 675,844 648,621 27,223 4.2

Total net position 969,871 861,819 108,052 12.5

Total liabilities andnet position $ 1,771,021 1,665,479 105,542 6.3




June 30, 2014 and 2013

7 (Continued)

Table 1Net Position

June 30, Dollar Percentage2013 2012 change change

Current and other assets $ 1,191,636 871,067 320,569 36.8%Capital assets 455,283 392,567 62,716 16.0

Total assets 1,646,919 1,263,634 383,285 30.3

Deferred outflows of resources 18,560 14,718 3,842 26.1

Total assets anddeferred outflows ofresources $ 1,665,479 1,278,352 387,127 30.3

Long-term debt $ 483,789 234,904 248,885 106.0Other liabilities 319,871 268,653 51,218 19.1

Total liabilities 803,660 503,557 300,103 59.6

Net position:Net investment in capital assets 197,200 176,402 20,798 11.8Restricted 15,998 13,771 2,227 16.2Unrestricted 648,621 584,622 63,999 10.9

Total net position 861,819 774,795 87,024 11.2

Total liabilities andnet position $ 1,665,479 1,278,352 387,127 30.3

At June 30, 2014, the Hospital’s cash and investments decreased $75.8 million or 8.1% compared to June 30,

2013. The majority of the decrease in fiscal 2014 cash and investments is attributable to purchases of property

and equipment (including construction of a new comprehensive acute and ambulatory care facility on the east

side of Madison), repayments of long-term debt, interest paid, payments to UWSMPH for the AAA agreement,

increases in accounts receivable and in accounts payable.

At June 30, 2013, the Hospital’s cash and investments increased $305.6 million or 48.3% compared to June 30,

2012. The majority of the increase in fiscal 2013 cash and investments is attributable to increases from operating

activities and proceeds from long-term debt, offset by purchases of property, plant and equipment, repayments of

long-term debt and interest paid.

As of June 30, 2014, the Hospital reports the net present value of pledges receivable totaling $1.5 million for the

American Family Children’s Hospital in accordance with Governmental Accounting Standards Board (GASB)

Statement No. 33, Accounting and Financial Reporting for Nonexchange Transactions. The net present value of

pledges as of June 30, 2013 was $2.3 million.

Pension-related liabilities include $64.7 million and $71.6 million at June 30, 2014 and 2013, respectively, of

unfunded prior service liabilities for participants in the Wisconsin Retirement System. In December 2003, the




June 30, 2014 and 2013

8 (Continued)

State issued annual appropriation bonds and used the proceeds to retire its unfunded past service pension

obligation with the Wisconsin Retirement System, including the portion attributable to certain Hospital

employees. The Hospital is required to annually reimburse the State for its share of ongoing debt service

associated with the bonds, and in 2003, the Hospital recorded a liability for its estimated pro-rata share of the

principal based on an understanding of the terms of repayment at that time. In 2014, based on the State’s

methodology for allocating responsibility for ongoing debt service to State entities, the Hospital recorded an

adjustment of $1.1 million to pension-related liabilities and other nonoperating expense.

Other liabilities also include $28.8 million and $24.5 million at June 30, 2014 and 2013, respectively,

representing a postemployment benefit obligation for retiree health insurance and $8.7 million and $9.4 million

at June 30, 2014 and 2013, respectively, for the fair market value of the derivative instruments.

Table 2 compares 2014 revenues and expenses to 2013 and 2013 revenues and expenses to 2012, and shows the

increase in net position (in thousands).

Table 2

Condensed Schedule of Revenues, Expenses, and Changes in Net Position

June 30 Dollar Percentage

2014 2013 change change

Operating revenues:

Net patient service revenues $ 1,327,707 1,233,280 94,427 7.7%

Other operating revenue 26,077 24,367 1,710 7.0

Total operating

revenues – net 1,353,784 1,257,647 96,137 7.6

Operating expenses:

Salaries and benefits 639,992 588,190 51,802 8.8

Medical materials and supplies 295,188 253,118 42,070 16.6

Purchased services and agency costs 160,855 151,513 9,342 6.2

Depreciation and amortization 50,085 44,121 5,964 13.5

Other 114,061 112,073 1,988 1.8

Total operating expenses 1,260,181 1,149,015 111,166 9.7

Operating income 93,603 108,632 (15,029) (13.8)

Nonoperating revenues (expenses):

Investment income and change in

fair value 30,307 20,245 10,062 49.7




June 30, 2014 and 2013

9 (Continued)

Table 2




Interest expense $ (10,669) (10,110) (559) 5.5%

Payments to the UWSMPH for capital

expenditure support (15,272) (42,648) 27,376 (64.2)

Other 5,874 8,281 (2,407) (29.1)

Total nonoperating revenues

(expenses), net 10,240 (24,232) 34,472 (142.3)

Excess of revenues over

expenses before capital

grants, gifts and donations

and additions to

permanent endowments $ 103,843 84,400 19,443 23.0

Capital grants, gifts and donations 4,195 2,678 1,517 56.6

Additions to permanent endowments 14 (54) 68 (125.9)

Increase in net position 108,052 87,024 21,028 24.2

Net assets-beginning of year 861,819 774,795 87,024 11.2

Net assets-end of year $ 969,871 861,819 108,052 12.5

Table 2




Operating revenues:

Net patient service revenues $ 1,233,280 1,181,671 51,609 4.4%

Other operating revenue 24,367 19,258 5,109 26.5

Total operating revenues – net 1,257,647 1,200,929 56,718 4.7

Operating expenses:

Salaries and benefits 588,190 564,278 23,912 4.2

Medical materials and supplies 253,118 233,119 19,999 8.6

Purchased services and agency costs 151,513 135,298 16,215 12.0




June 30, 2014 and 2013

10 (Continued)

Table 2




Depreciation and amortization $ 44,121 43,606 515 1.2%

Other 112,073 97,491 14,582 15.0

Total operating expenses 1,149,015 1,073,792 75,223 7.0

Operating income 108,632 127,137 (18,505) (14.6)

Nonoperating revenues (expenses):

Investment income and change in

fair value 20,245 12,718 7,527 59.2

Interest expense (10,110) (25,668) 15,558 (60.6)

Payments to the UWSMPH for capital

expenditure support (42,648) (11,600) (31,048) 267.7

Other 8,281 (1,114) 9,395 (843.4)

Total nonoperating revenues

(expenses), net (24,232) (25,664) 1,432 (5.6)

Excess of revenues over

expenses before capital

grants, gifts and donations

and additions to

permanent endowments 84,400 101,473 (17,073) (16.8)

Capital grants, gifts and donations 2,678 3,987 (1,309) (32.8)

Additions to permanent endowments (54) 514 (568) (110.5)

Increase in net position 87,024 105,974 (18,950) (17.9)

Net assets-beginning of year 774,795 668,821 105,974 15.8

Net assets-end of year $ 861,819 774,795 87,024 11.2

Operating Revenues

Net patient service revenue in 2014 increased $94.4 million, or 7.7% from the prior year. The primary reasons for

the growth in revenue are the increases in the number of patients cared for and third-party payor reimbursement

increases which averaged 2.9% during the year offset by an increase in the provision for charity care and bad

debts. Inpatient volume, measured by admissions, increased approximately 500, or 1.7%, and outpatient volume,

measured by visits, increased approximately 7,900 or 1.3%. Patient days increased approximately 2,700 or 1.9%.

The Hospital’s case-mix index (CMI), which is a measure of patient acuity, calculated on an MS-DRG basis was

2.02 in 2014 and 2.00 in 2013.




June 30, 2014 and 2013

11 (Continued)

Sources of net patient service revenue by payor category for fiscal years 2014 and 2013 are depicted below:

Table 3Payor Mix

Fiscal year Percentage2014 2013 change

Medicare 25.1% 26.0% (3.5)%Medicaid 7.6 7.0 8.6Indemnity 4.1 4.3 (4.7)Managed care 52.8 52.6 0.4Private pay and other 10.4 10.1 3.0

100.0% 100.0%

Net patient service revenue in 2013 increased $51.6 million, or 4.4% from the prior year. The primary reasons for

the growth in revenue are the increases in the number of patients cared for and third-party payor reimbursement

increases which averaged 2.9% during the year offset by an increase in the provision for charity care and bad

debts. Inpatient volume, measured by admissions, increased approximately 800, or 2.9%, and outpatient volume,

measured by visits, stayed at approximately the same level as the prior year. Patient days increased

approximately 4,800 or 3.5%. The Hospital’s case-mix index (CMI), which is a measure of patient acuity,

calculated on an MS-DRG basis was 2.00 in 2013 and 1.94 in 2012.

Sources of net patient service revenue by payor category for fiscal years 2013 and 2012 are depicted below:

Table 3Payor Mix

Fiscal year Percentage2013 2012 change

Medicare 26.0% 25.4% 2.4%Medicaid 7.0 7.7 (9.1)Indemnity 4.3 4.6 (6.5)Managed care 52.6 53.0 (0.8)Private pay and other 10.1 9.3 8.6

100.0% 100.0%

Other operating revenue, which includes nonpatient revenue such as cafeteria sales, other auxiliary services and,

commencing in 2014, revenues from Inntowner LLC, increased approximately $1.7 million to $26.1 million in

2014 or 7.0% and increased approximately $5.1 million to $24.4 million, or 26.5% in 2013.

Operating Expenses

Operating expenses increased by $111.2 million, or 9.7%, in 2014 compared to the prior year. The categories of

expenses that caused the majority of the increase were salaries and wages, employee benefits and medical




June 30, 2014 and 2013

12 (Continued)

materials and supplies. Salaries and wages expense increased 6.1% from 2013 due to wage rate increases and

increases in FTEs. Employee benefits increased 15.9% from 2013 due to increases in FTE’s, rates, payment

received in 2013 for a FICA resident reimbursement and change in the workers compensation reserve. The

increase in medical materials and supplies compared to the prior year was primarily in pharmaceuticals due to the

increase in high cost specialty drugs. The increase in purchased services is due to additional commitments to the

UWSMPH and University of Wisconsin Medical Foundation (UWMF) pursuant to an affiliation agreement.

Operating expenses increased by $75.2 million, or 7.0%, in 2013 compared to the prior year. The categories of

expenses that caused the majority of the increase were salaries and wages, medical materials and supplies,

purchased services and agency costs and other expenses. Salaries and wages expense increased 6.3% from 2012

due to wage rate increases and increases in FTEs. The increase in medical materials and supplies compared to the

prior year was primarily in pharmaceuticals and medical/surgical supplies. The increase in purchased services is

due to: additional commitments to the UWSMPH and University of Wisconsin Medical Foundation (UWMF)

pursuant to an affiliation agreement; debt issuance costs for the Series 2013A bonds that as of 2013, with the

early adoption of GASB Statement No. 65, Items Previously Reported as Assets and Liabilities, now classifies

debt issuance costs as an expense when incurred; and organ acquisition fees. Other expenses increased

$10.3 million or 14.4% primarily in purchases of minor equipment and building rental due to the opening of

DHC.

Nonoperating Revenues and Expenses

Nonoperating revenues and expenses consist primarily of income from the Hospital’s cash and long-term

investments, interest expense on long-term debt, the change in fair market value of interest rate swaps, the equity

interest in gain or loss from joint ventures, noncapital grants and contributions, other, net and payments to

UWSMPH. Investment income, including the change in fair value of investments, increased from $17.4 million

in 2013 to $30.5 million in 2014, and increased from $12.3 million in 2012 to $17.4 million in 2013, as depicted

in the following chart (amounts are in thousands):

Table 4Investment Earnings by Asset Category

2014 2013 2012

Interest and dividend income:Equity investments $ 3,663 3,427 3,395 Fixed-income investments 8,982 13,286 11,584

Total investment income 12,645 16,713 14,979

Net increase (decrease) in fair value ofinvestments 17,862 663 (2,718)

Total $ 30,507 17,376 12,261

Equity interest in income of joint ventures remained relatively stable at $3.3 million in 2013 and 2014. The

change in fair value of the interest rate swap agreements resulted in $(0.2) million expense in 2014 and

$2.9 million income in 2013.




June 30, 2014 and 2013

13 (Continued)

Interest expense was $10.7 million in 2014, $10.1 million in 2013 and $25.7 million in 2012. The increase in

2014 is due to a slight increase in rates from bonds that were moved from variable to fixed rates in 2013. Interest

expense in 2013 includes interest on the Series 2013A bond financing. The decrease from 2012 to 2013 is

primarily due to a nonrecurring financial statement adjustment in 2012 to retroactively record additional interest

expense for several prior years associated with pension-related obligations.

Capital Assets

At June 30, 2014, the Hospital had $609.1 million, net of accumulated depreciation and amortization, invested in

capital assets. This represents a net increase of $153.8 million, or 33.8%, over 2013. The net change is due to

completion of the buildout of American Family Children’s Hospital (AFCH), buildout of the NICU and Pediatric

Universal Care Unit, Autopsy and Pathology Suite, shell space for additional AFCH expansion and ongoing

construction of a new facility on the east side of Madison, offset by depreciation expense.

At June 30, 2013, the Hospital had $455.3 million, net of accumulated depreciation and amortization, invested in

capital assets. This represents a net increase of $62.7 million, or 16.0%, over 2012. The net change is due to

purchase of new capital assets in 2013, including the Inntowner LLC’s land, buildings and equipment, offset by

depreciation expense.

Table 5 shows a summary of capital assets, net of accumulated depreciation and amortization, at June 30, 2014,

2013, and 2012 and major additions by year for the years ended June 30, 2014, 2013, and 2012 (in thousands).

Table 5Capital Assets at Year-End (Net of Accumulated Depreciation and Amortization)

2014 2013 2012

Land $ 24,405 21,564 17,064 Buildings and land improvements 328,846 295,004 285,413 Equipment 129,020 103,700 77,539 Construction in progress 126,846 35,015 12,551

Total $ 609,117 455,283 392,567




June 30, 2014 and 2013

14 (Continued)

Major Additions by Year

2014 2013 2012

Land acquisition $ 2,841 4,500 — Buildings and improvements:

Buildout of AFCH NICU and PediatricUniversal Care Unit 9,442 — —

Autopsy and Pathology Suite 13,085 — — Shell space for expansion of additional

AFCH floors 15,379 — — AFCH Diagnostic and Therapy unit 6,415 — — Operating room expansion 632 12,960 — Inntowner building/remodeling 648 7,804 — Additional fire alarm strobes and system upgrade 2,950 — — Plumbing and water treatment 607 — — Improvements to new leased facility

(Digestive Health Center) — 2,356 — Inpatient unit remodeling — 1,128 2,031 Remodeled pediatric space in ED — 767 — Remodeled outpatient clinic 725 — 1,594 Receiving dock renovation and expansion — — 1,289 Reprocessing renovation — — 505

Equipment:Nurse call upgrade 1,190 — — Enterprise licensing 1,509 — — Patient telemonitoring system 1,541 — — Monoplane x-ray systems 3,988 — — Air handling unit 1,977 — — Tomotherapy systems 4,591 — — Inntowner room remodeling equipment 1,123 — — Linear accelerator — 3,920 — IV Infusion pumps and pump system — 3,717 — Magnetic Resonance Imaging (MRI) machine — 2,873 — Biplane imaging system 1,825 2,724 1,562 Inntowner equipment — 2,200 — Computer-assisted Tomography (CT) machine — 2,139 — Microsoft licensing — 1,336 — DaVinci HD Robot surgical system — — 1,698 Vital sign monitors — — 1,559

Construction in progress at June 30, 2014 consists principally of costs incurred for the construction of a new

comprehensive acute and ambulatory care facility on the east side of Madison, expansion of an operating room,

isolation fan upgrade and room remodeling.

For more information about the Hospital’s capital asset activity, please see note 6 to the financial statements.

Ongoing capital requirements will be funded primarily from operations and the remaining proceeds of a 2013




June 30, 2014 and 2013

15 (Continued)

tax-exempt bond financing. The Hospital’s total capital budget for 2015 is $211.2 million compared to

$202.5 million in 2014. The 2015 budget includes $62.0 million that was deferred from 2014 to 2015.

Long-Term Debt

At June 30, 2014, the Hospital had $451.6 million in long-term debt, excluding current installments, compared to

$468.6 million at June 30, 2013 – a decrease of 3.6% due to principal payments on the State of Wisconsin

general obligation and refunding bonds, Series 2008A, Series 2009B, Series 2011A, Series 2013A, GE

Equipment Loan, Equipment Financing agreement and capital leases.

Table 6 below provides the detail of outstanding long-term debt, excluding current installments, as of June 30,

2014, 2013, and 2012 (in thousands):

Table 6Outstanding Long-Term Debt – at Year-End

2014 2013 2012

State of Wisconsin general obligation andrefunding bonds $ 267 559 1,222

Authority Fixed Rate Revenue Bonds,Series 2008A 13,130 14,905 47,685

Authority Variable Rate Demand RevenueBonds, Series 2009B 30,820 30,875 52,695

Authority Fixed Rate Adjustable RevenueBonds, Series 2009C — — 4,394

Authority Fixed Rate Adjustable RevenueBonds, Series 2011A 51,945 54,145 56,245

Authority Fixed Rate Adjustable RevenueBonds, Series 2011B 61,000 61,000 61,000

Authority Fixed Rate Adjustable RevenueBonds, Series 2013A 266,525 269,765 —

Equipment Loan 511 2,002 3,425 Equipment Financing Agreement 4,466 8,932 — Capital Leases 4,120 6,247 — Premium on Series 2013A Bonds 18,857 20,216 — Premium on Series 2002B Bonds — — 48

Total $ 451,641 468,646 226,714

The Series 2013A and Series 2008A bonds carry ratings of Aa3 by Moody’s and A+ from Standard & Poor’s.

The Series 2009B bonds are secured by an irrevocable transferable direct pay letter-of-credit agreement issued by

US Bank and these bonds carry an underlying Aa3 rating from Moody’s and A+ from Standard & Poor’s. They

also carry a long-term rating of AAA from Moody’s and Standard & Poor’s based on the joint criteria with the

letter-of-credit provider. Series 2011A bonds and Series 2011B bonds are supported by direct bank purchase

agreements with a commercial bank and, as such, are not rated.




June 30, 2014 and 2013

16

Current legislation requires the Hospital to obtain approval of additional bond issuance from its board of

directors, notify the State Joint Committee on Finance and the Department of Administration about its debt

issuance plans and maintain an unenhanced bond rating in the category of “A” or better from Standard & Poor’s

Corporation and Moody’s Investor Service, Inc. For more information about the Hospital’s outstanding debt,

please see note 7 to the financial statements.

Economic Factors and Next Year’s Budgets and Rates

The Hospital’s senior leadership team considered many variables in developing the 2015 budget and rates.

Among those were: the expected payments from the Federal Medicare and State Medicaid Programs, which

represent a substantial portion of the Hospital’s business, and whose rate increases have historically not kept pace

with cost inflation; the increase in the percentage of the Hospital’s patients now covered under capitation-based

contracts; anticipated salary increases and staff additions; expected cost increases for medical supplies and

pharmaceuticals; and other expected cost increases affecting key contracted services. The 2015 budget, as

approved by the Hospital’s board of directors, projects income from operations of $69.8 million, resulting in an

operating margin of 5.0%. Net income is budgeted at $87.4 million representing a total margin of 6.2%. The

2015 budget calls for volume increases of 1.5% for inpatient admissions, 3.0% for inpatient days, and 1.3% for

outpatient clinic visits.

Requests for Information

This financial report is designed to provide a general overview of University of Wisconsin Hospitals and Clinics

Authority’s financial results for all those with an interest in the Hospital’s finances. Questions concerning any of

the information provided in this report or requests for additional financial information should be addressed to

Chief Financial Officer, 600 Highland Avenue, Mail Drop # 8370, Madison, Wisconsin 53792.

UNIVERSITY OF WISCONSIN HOSPITALSAND CLINICS AUTHORITY

Statements of Net Position

June 30, 2014 and 2013

(In thousands)

Assets 2014 2013

Current assets:Cash and cash equivalents $ 60,260 66,270 Patient accounts receivable, net of estimated uncollectible

accounts of $39,000 in 2014 and $34,000 in 2013 163,776 142,671 Other receivables 16,963 14,336 Inventories of supplies 15,754 9,083 Prepaid expenses 7,242 6,794

Total current assets 263,995 239,154

Noncurrent cash and investments:Designated by board for capital replacement and debt retirement 157,337 157,078 Held by trustee for capital projects and other purposes 125,452 207,148 Restricted by donors 6,865 11,281 Principal of permanent endowments 2,397 2,383 Other long-term investments 510,727 494,674

Total noncurrent cash and investments 802,778 872,564

Capital assets:Nondepreciable, including construction-in-progress 154,555 59,431 Depreciable, net 454,562 395,852

Total capital assets, net 609,117 455,283

Investments in joint ventures 62,874 56,908 Pledges receivable 1,489 2,317 Other assets 14,023 20,693

Total assets 1,754,276 1,646,919

Deferred Outflows of Resources

Accumulated decrease in fair value of derivative instruments 4,160 5,048 Deferred loss on debt refunding 12,585 13,512

Total deferred outflows of resources 16,745 18,560

Total assets and deferred outflows of resources $ 1,771,021 1,665,479

See accompanying notes to basic financial statements.

17

Liabilities and Net Position 2014 2013

Current liabilities:Current installments of long-term debt $ 16,404 15,143 Accounts payable 67,629 35,371 Accrued expenses 112,195 127,639 Estimated payables to Medicare and Medicaid 51,088 51,416

Total current liabilities 247,316 229,569

Long-term debt, less current installments 451,641 468,646 Other long-term liabilities 8,706 9,394 Other postemployment benefit obligation 28,791 24,460 Pension-related liabilities 64,696 71,591

Total liabilities 801,150 803,660

Net position:Net investment in capital assets 283,267 197,200 Restricted – expendable for donor specified purposes 8,363 13,615 Restricted – nonexpendable 2,397 2,383 Unrestricted 675,844 648,621

Total net position 969,871 861,819

Total liabilities and net position $ 1,771,021 1,665,479

18


Statements of Revenues, Expenses, and Changes in Net Position

Years ended June 30, 2014 and 2013

(In thousands)

2014 2013

Operating revenues:Net patient service revenue (net of provision for bad debts

of $34,563 in 2014 and $27,399 in 2013) $ 1,327,707 1,233,280 Other operating revenues 26,077 24,367

Total operating revenues, net 1,353,784 1,257,647

Operating expenses:Salaries and wages 453,924 427,686 Employee benefits 186,068 160,504 Other expenses 84,377 81,805 Repairs, maintenance, and utilities 29,684 30,268 Purchased services and agency costs 160,855 151,513 Medical materials and supplies 295,188 253,118 Depreciation and amortization 50,085 44,121

Total operating expenses 1,260,181 1,149,015

Operating income 93,603 108,632

Nonoperating revenues (expenses):Investment income 12,645 16,713 Net increase (decrease) in fair value of investments 17,862 663 Interest expense (10,669) (10,110) Equity interest in income/loss of joint ventures 3,257 3,268 Net increase (decrease) in fair value of derivative instruments (200) 2,869 Other, net 2,617 5,013 Contributions to University of Wisconsin School of Medicine and

Public Health (15,272) (42,648)

Total nonoperating revenues (expenses), net 10,240 (24,232)

Excess of revenues over expenses before capitalgrants, gifts, and donations and additions topermanent endowments 103,843 84,400

Capital grants, gifts and donations 4,195 2,678 Additions (deductions) to permanent endowments 14 (54)

Increase in net position 108,052 87,024

Net position – beginning of the year 861,819 774,795

Net position – end of the year $ 969,871 861,819


19


Statements of Cash Flows


(In thousands)

2014 2013

Cash flows from operating activities:Cash received from and on behalf of patients $ 1,306,602 1,240,472 Payments to suppliers (531,628) (482,646) Payments to employees (633,888) (581,024)

Net cash provided by operating activities 141,086 176,802

Cash flows from noncapital financing activities:Noncapital grants, contributions and other adjustments 1,064 1,447 Payments for pension-related liabilities (4,439) (4,021) Additions (deductions) to permanent endowment 14 (54) Payment to University of Wisconsin School of Medicine and Public Health (36,306) (7,009)

Net cash used in noncapital financing activities (39,667) (9,637)

Cash flows from capital and related financing activities:Capital grants, gifts, and donations received 5,018 3,051 Proceeds from long-term debt — 293,010 Repayment of principal on long-term debt (15,065) (71,275) Interest paid on long-term debt (17,932) (10,639) Financing costs — 1,130 Loss on bond refinancing — (6,434) Purchases of capital assets (178,224) (90,831) Proceeds from sale of capital assets 173 18

Net cash provided by (used in) capital and related financing activities (206,030) 118,030

Cash flows from investing activities:Proceeds from sales of investments 107,658 23,983 Purchases of investments (10,258) (209,345) Investment income received/fees paid 996 (31) Increase in investment in joint venture (2,709) 239 Other, net 61 3,724

Net cash provided by (used in) in investing activities 95,748 (181,430)

Net increase (decrease) in cash and cash equivalents (8,863) 103,765

Cash and cash equivalents:Beginning of year 165,926 62,161

End of year $ 157,063 165,926

(Continued)20


Statements of Cash Flows


(In thousands)

2014 2013

Reconciliation of cash and cash equivalents to statement of net position:Cash and cash equivalents in current assets $ 60,260 66,270 Cash equivalents in noncurrent cash and investments 96,803 99,656

Total cash and cash equivalents $ 157,063 165,926

Reconciliation of operating income to net cash provided by operating activities:Operating income $ 93,603 108,632 Adjustments to reconcile operating income to net cash provided by

operating activities:Provision for bad debts 34,563 27,399 Depreciation and amortization 50,085 44,121 Amortization on bond premium and deferred loss on bond refinancing 248 341 Change in other postemployment benefit obligation 4,331 3,742 Changes in assets and liabilities:

Patient accounts receivable (55,668) (20,207) Other receivables (2,628) (2,884) Inventories of supplies (6,671) (608) Prepaid expenses (448) (534) Other assets (268) (423) Accounts payable 21,587 (5,230) Accrued expenses 2,680 3,118 Estimated payables to Medicare and Medicaid (328) 19,335

Total adjustments 47,483 68,170

Net cash provided by operating activities $ 141,086 176,802

Noncash investing, capital and financing activities:The Hospital held investments at June 30, 2014 and 2013 with fair values of $705,975 and $772,908, respectively.

During 2014 and 2013, the net increase in the fair value of these investments was $17,862 and$663, respectively.

The Hospital has recorded pledges of $1,489 in 2014 and $2,317 in 2013 related to the American Family Children’sHospital Campaign.


21



Notes to Basic Financial Statements

June 30, 2014 and 2013

22 (Continued)

(1) Summary of Organization and Significant Accounting Policies

The University of Wisconsin Hospitals and Clinics Authority (the Hospital) is an academic medical center

operating an acute care hospital with 545 available beds, numerous specialty clinics, and four ambulatory

facilities providing comprehensive health care to patients, education programs, research, and community

service primarily to residents of southern Wisconsin.

Prior to fiscal year 1997, the Hospital was a unit of the University of Wisconsin – Madison

(the University). Beginning in fiscal year 1997, in accordance with legislation passed by the Wisconsin

State Legislature, the Hospital restructured as a Public Authority, a public body corporate and politic

created by Wisconsin Statutes. This legislation provided, among other things, for the Board of Regents of

the University of Wisconsin System (Board of Regents) to execute various agreements with the Hospital.

The State of Wisconsin (the State) appoints the majority of the board of directors of the Hospital. Based on

statutorily mandated relationships with State governmental units, the Hospital is included as a discretely

presented component unit in the State’s basic financial statements.

Under the terms of a Lease Agreement, the Hospital leases the facilities that were occupied by the Hospital

as of June 29, 1996, for a nominal annual amount for an initial term of 30 years to be renewed annually

with automatic extensions of one additional year on each July 1 until action is taken to stop the extensions.

In addition, the Hospital is required to repay the State’s outstanding debt obligations on the leased

facilities. The leased facilities are included with the Hospital’s capital assets (note 6), and the debt

obligations on the leased facilities are included with the Hospital’s long-term debt (note 7).

An Affiliation Agreement (the Agreement) requires the Hospital to continue to support the educational,

research, and clinical activities of the University, including the University of Wisconsin School of

Medicine and Public Health (UWSMPH) and the University of Wisconsin Schools of Nursing and

Pharmacy (note 4). Subject to a Contractual Services Agreement and Operating and Service Agreement

between the Board of Regents and the Hospital, the two parties have entered into contracts with each other

for the continuation of the provision of services in support of programs and operations.

On December 28, 2012, the Hospital formed a new company, The Inntowner LLC, and purchased the

Madison Best Western Inntowner Hotel. The hotel provides a short-term housing option for regional

patients prior to and following their hospital stay, including those who need to remain in proximity to the

Hospital for post-discharge care.

The significant accounting policies of the Hospital are as follows:

(a) Basis of Accounting

The accounting policies of the Hospital conform to accounting principles generally accepted in the

United States of America as applicable to governmental entities. The accounts of the Hospital, which

are reported similar to an enterprise fund, are used to account for the Hospital’s activities that are

financed and operated in a manner similar to a private business enterprise. Accordingly, the Hospital

maintains its records on the accrual basis of accounting. Revenues from operations, investments, and

other sources are recorded when earned. Expenses, including depreciation and amortization, are

recorded when incurred.




June 30, 2014 and 2013

23 (Continued)

Nonexchange transactions, in which the Hospital receives value without directly giving equal value

in return, include grants and contributions. Revenues from grants and contributions are recognized in

the fiscal year in which all eligibility requirements have been satisfied. Eligibility requirements

include timing requirements, which specify the year the resources are required to be used or the

fiscal year in which use is first permitted, and expenditure requirements, in cases where the resources

are provided to the Hospital on a reimbursement basis.

(b) Cash and Cash Equivalents

Cash and cash equivalents are defined as highly liquid investments purchased with an original

maturity of three months or less.

(c) Inventories of Supplies

The inventories of supplies are valued at the lower of cost (first-in, first-out) or market.

(d) Investments and Investment Income

Investments in equity securities with readily determinable fair values and all investments in debt

securities are recorded at fair value based upon quoted market prices. The pooled investment funds

on deposit with the University of Wisconsin Foundation in its “Pooled Expendable Fund” are

recorded at cost, plus accrued earnings to date. The University of Wisconsin Foundation assumes the

market risk for the Hospital’s investment in the University of Wisconsin Foundation – Expendable

Fund. The pooled investment funds on deposit with the University of Wisconsin Foundation in its

“Pooled Endowment Fund” are recorded using net asset value as a practical expedient in estimating

fair value, based on information provided by the University of Wisconsin Foundation. The estimated

values are reviewed and evaluated by the Hospital. Interest, dividends, and changes in the fair value

of investments are included in nonoperating revenue.

Investments in joint ventures, in which the Hospital has the ability to exercise significant but not a

controlling influence over the ventures’ operating and financial policies, are recorded using the

equity method of accounting.

(e) Capital Assets

Capital assets are stated at cost. Capital assets under capital leases are stated at the present value of

minimum lease payments. Donated capital assets are recorded at fair market value at the date of

donation, which then becomes the asset’s historical cost. Depreciation or amortization on capital

assets is calculated on the straight-line method over the shorter of the estimated useful life or the

period of the lease term. Gains (losses) on sales of capital assets are recorded as nonoperating

revenues (expenses). Additions, replacements, major repairs, and renovations are capitalized. Costs

of repairs and maintenance are expensed as incurred. The estimated useful life of capital assets is as

follows:

Buildings and improvements 20 – 40 yearsEquipment 3 – 10 years




June 30, 2014 and 2013

24 (Continued)

(f) Costs of Borrowing

Prior to 2013, costs incurred in connection with the issuance of long-term debt were deferred and

amortized on a straight-line basis over the term of the bonds, which approximated the interest-yield

method. In 2013, the Hospital elected to early adopt GASB Statement No. 65, Items Previously

Reported as Assets and Liabilities. Under the new provisions, long-term debt issuance costs are

recognized as an expense in the period incurred. Although accounting changes adopted to conform to

Statement No. 65 should generally be applied retroactively by restating prior years’ financial

statements, it has been determined that the effects of such restatement would be immaterial. An

adjustment of $979,000 is reflected in operating expense in the statement of revenues, expenses and

changes in net position for the year ended June 30, 2013 to reflect the prior years’ impact.

(g) Contributions

From time to time, the Hospital receives contributions from individuals and private organizations.

Revenues from contributions (including contributions of capital assets) are recognized when all

eligibility requirements, including time requirements, are met. Contributions may be restricted for

either specific operating purposes or for capital purposes. Amounts that are unrestricted or that are

restricted for a specific operating purpose are reported as nonoperating revenues. Amounts restricted

to capital acquisitions are reported as capital grants, gifts, and donations.

Endowments are provided to the Hospital on a voluntary basis by individuals and private

organizations. Permanent endowments require that the principal or corpus of the endowment be

retained in perpetuity. If a donor has not provided specific instructions, the net appreciation of the

investments of endowment funds are recorded with investment income in nonoperating revenue.

(h) Net Position

Net position of the Hospital is classified into four components:

Net Investment in Capital Assets – which consists of capital assets, net of accumulated depreciation

and amortization, reduced by the current balances of any outstanding borrowings used to finance the

purchase or construction of those assets and deferred outflows or inflows of resources that are

attributable to the acquisition, construction, or improvement of those assets or related debt.

Restricted, Expendable – which must be used for a particular purpose, as specified by creditors or

contributors external to the Hospital.

Restricted, Nonexpendable – which equals the principal portion of permanent endowments.

When the Hospital has both restricted and unrestricted resources available to finance a particular

program, generally it is the Hospital’s policy to use the restricted resources before the unrestricted

resources.

Unrestricted Net Position – which are remaining net position, deferred outflows of resources,

liabilities, and deferred inflows of resources that do not meet the definitions of net investment in

capital assets or restricted net position.




June 30, 2014 and 2013

25 (Continued)

(i) Operating and Nonoperating Revenues and Expenses

The Hospital’s statements of revenues, expenses, and changes in net position distinguish between

operating and nonoperating revenues and expenses. Operating revenues result from exchange

transactions associated with providing healthcare services – the Hospital’s principal activity.

Nonexchange revenues, including contributions received for purposes other than capital asset

acquisition support payments to related organizations, are reported as nonoperating revenues.

Operating expenses are all expenses incurred to provide healthcare services. Nonexchange expenses,

including interest expense and other expenses incidental to the Hospital’s principal activity, are

reported as nonoperating expenses.

(j) Net Patient Service Revenue

Net patient service revenue is reported at the estimated net realizable amounts from patients,

third-party payors, and others for services rendered. Reimbursable amounts from third-party payors

are estimated in the period the related services are rendered and adjusted in future periods, as final

settlements are determined.

Net patient service revenue includes revenue derived from agreements with various managed care

organizations to provide medical services to subscribing participants. Under certain of these

agreements, the Hospital receives fixed monthly capitation payments (generally, adjusted annually)

based on the number of each managed care organization’s participants, regardless of services

actually performed by the Hospital. The Hospital recognizes, in the year of contractual commitment,

any losses on these contracts when it is probable that expected medical and maintenance expense

under a group of existing contracts would exceed anticipated premiums and recoveries on these

contracts. In other agreements, the managed care organizations make fee for service payments to the

Hospital for certain covered services based primarily upon discounted fee schedules.

(k) Charity Care

The Hospital has a policy of providing healthcare services, without charge or at amounts less than

established rates, to those unable to pay all or a portion of their charges and who meet certain

eligibility criteria established in the Hospital’s charity care policy. Because the Hospital does not

pursue collection of amounts determined to qualify as charity care, they are not reported as patient

service revenue.

(l) Risk Management

The Hospital is exposed to various risks of loss from torts; theft of, damage to, and destruction of

assets; business interruption; errors and omissions; employee injuries and illnesses; natural disasters;

and employee health, dental, and accident benefits. The Hospital is self-insured for workers’

compensation (note 13). The estimated provision for self-insured workers’ compensation includes

the ultimate cost for both reported losses and losses incurred but not reported as of the respective

statement of net position dates. Commercial insurance coverage is purchased for other claims arising

from such matters. The primary commercial insurance for professional liability is a full deductible

policy (note 12). Settled claims have not exceeded this commercial coverage in any of the two

preceding years.




June 30, 2014 and 2013

26 (Continued)

(m) Compensated Absences

The Hospital’s employees earn vacation days at varying rates depending on years of service.

Employees may accumulate vacation time up to a specified maximum. Employees are paid for

accumulated vacation time if they terminate employment. Consistent with the compensated absences

reporting standards of GASB Statement No. 16, Accounting for Compensated Absences, an accrual

for certain salary-related payments associated with compensated absences is included in accrued

expenses.

(n) Income Taxes

The Hospital qualifies as a Section 501(c)(3) not-for-profit institution of the Internal Revenue Code

(the Code) and, therefore, is exempt from federal income taxes pursuant to Section 501(a) of the

Code. The Hospital is, however, subject to federal income taxes on any unrelated business income

under the provisions of Section 511 of the Code. The Hospital is exempt from state income taxes

under Section 71.26(b)(e) of Wisconsin Statutes.

(o) Use of Estimates

The preparation of financial statements in conformity with U.S. generally accepted accounting

principles requires management to make estimates and assumptions that affect the reported amounts

of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial

statements and the reported amounts of revenues and expenses during the reporting period. Actual

results could differ from those estimates.

(p) Derivative Instruments

The Hospital’s derivative instruments represent interest rate swaps that are used as part of its risk

management strategy to manage exposure to fluctuations in interest rates and to manage the overall

cost of its debt. Interest rate swaps are used to hedge identified and approved exposures and are not

used for speculative purposes.

The Hospital records derivative instruments on the statement of net position as either an asset or

liability measured at their fair market values. The Hospital records the changes in fair market value

of ineffective derivative instruments on the statements of revenues, expenses and changes in net

position. The Hospital records the changes in fair market value of effective derivative instruments on

the statements of net position as deferred outflows of resources

(q) Pension-Related Liabilities

The Hospital has certain post-retirement obligations for its current and former employees that are

reflected as pension-related liabilities in its financial statements. The first such obligation relates to

pension plan enhancements that occurred between 1982 and 1990 that created a prior service pension

obligation for all State of Wisconsin agencies covered under the Wisconsin Retirement System. The

second component relates to a sick leave conversion program that allows retiring State agency

employees to convert unused sick leave at the time of their retirement to pay for post-retirement

health insurance. The State legislature adopted provisions in 1984 which mandated advance funding




June 30, 2014 and 2013

27 (Continued)

of this sick leave conversion program and gave rise to a second unfunded obligation. Each State

agency was assigned a portion of these obligations reflecting the actuarially computed share

associated with its employees. At the time these events occurred, the Hospital was deemed an agency

of the State and was assigned a portion of these obligations. The Hospital has been funding these

obligations following an amortization period that runs through 2030.

In December 2003, the State of Wisconsin Department of Administration issued Annual

Appropriation Bonds to allow it to accelerate the funding of a substantial portion of these obligations

for many of its agencies, including a portion attributable to a subset of Hospital employees that at the

time were still deemed to be State employees. The Hospital is responsible for reimbursing the State

for its portion of the annual debt service related to the bonds. That liability is also included as a

component of pension-related liabilities on the Hospital’s statement of net position.

Since 2003, the State has refinanced and entered into swap arrangements for various portions of the

Annual Appropriation Bonds. As a result, the debt service associated with those bonds varies over

time. In addition, the percentage of the debt service allocable to the Hospital varies over time based

on the State’s methodology for allocating that liability to its various agencies. The Hospital adjusts

its records, as necessary, whenever its allocated share of the outstanding debt service changes. Any

adjustment representing additional interest is reported as interest expense and any portion

attributable to principal is reported as other nonoperating expense.

(r) Reclassification

Certain prior year financial statement amounts have been reclassified to conform to the current year

presentation.

(2) Restricted Net Position and Endowments

Restricted expendable net position as of June 30, 2014 and 2013 are available for the following purposes

(in thousands):

2014 2013

Capital purposes $ 3,774 9,977 Research and general 4,589 3,638

Total expendable restricted net position $ 8,363 13,615

Restricted nonexpendable net position as of June 30, 2014 and 2013 represents the principal amounts of

permanent endowments restricted to investment in perpetuity. Investment earnings for the Hospital’s

permanent endowments are expendable for purposes restricted by the donors primarily for patient

assistance purposes.

(3) Designated Unrestricted Net Position

Included in the $675,844,000 and $648,621,000 of unrestricted net position reported as of June 30, 2014

and 2013, respectively, are $157,337,000 and $157,078,000, respectively, that have been designated by the




June 30, 2014 and 2013

28 (Continued)

Hospital’s board of directors for capital replacement and debt retirement. Designated funds remain under

the control of the board of directors, which may, at its discretion, later designate the funds for other

purposes.

(4) Transactions with Related Parties

The Hospital receives certain administrative and other general services from the University and provides

direct support for the educational, research, and clinical activities of the University through the Agreement.

Direct costs associated with these services and support approximated $61,490,000 and $61,338,000 in

2014 and 2013, respectively. The Hospital committed to support certain UWSMPH and University of

Wisconsin School of Nursing capital expenditures as incurred, with the remaining $1,899,000 as of

June 30, 2014, of the commitment to be paid as the capital projects commence in agreed-upon installments.

At June 30, 2014 and 2013, the Hospital had $2,645,000 and $2,658,000 in receivables, respectively, and

$6,092,000 and $4,504,000 in payables, respectively, with the University.

In addition to the historic Affiliation Agreement transfers, the Hospital’s board of directors approved, in

fiscal year 2013, the provisions of an Annual Academic Advancement Agreement (AAA) to establish

guidelines as to when the Hospital will provide additional financial support to UWSMPH for

education/clinical programs and outcomes research. Under the original AAA provisions, if the operating

margin of the Hospital for any fiscal year exceeded a defined threshold, initially established as 5%, and

days cash-on-hand exceeds a defined threshold, initially established as 180 days, the Hospital would make

a distribution to UWSMPH. During fiscal year 2014, the AAA was amended such that the operating

income representing the operating margin between 5% and 6% is distributed entirely to UWSMPH.

Amounts in excess of 6% are partially distributed to UWSMPH. Included in nonoperating expense and

accrued expenses is an estimated payment due to UWSMPH of $14,605,000 and $35,639,000,

respectively, representing the expected payment for the 2014 and 2013 fiscal year.

University Health Care, Inc. (UHC) is a Wisconsin nonstock, not-for-profit corporation. UHC primarily is

engaged in furthering the teaching, research, and service functions of the Hospital, UWSMPH, and the

University of Wisconsin Medical Foundation (UWMF), each of which are members of UHC. UHC owns

100% of the equity interest of Unity Health Plans and its acquisition was funded 60% by the Hospital and

40% by UWMF. By resolution of UHC and agreement by its members, the Hospital and UWMF shall

indirectly hold 60% and 40%, respectively, of the equity and ownership rights of Unity Health Plans. The

UWSMPH shall have no ownership rights or funding obligations in and to Unity Health Plans. The super

majority rights for governance of Unity Health Plans do not grant control to either the Hospital or UWMF.

As such, the Hospital’s investment in Unity Health Plans through UHC is accounted for by the equity

method. At June 30, 2014 and 2013, the Hospital had $1,186,000 and $1,648,000 in receivables,

respectively, with Unity Health Plans and UHC. The Hospital received payments of $78,809,000 and

$64,218,000 for the years ended June 30, 2014 and 2013, respectively, from UHC under a capitation

agreement with Unity Health Plans. Through February 1, 2013, Unity Health Plans assumed the risk in the

event of hospital utilization in excess of capitation payments. Under the terms of a risk-sharing contract

amendment effective February 1, 2013, UHC has assumed the benefits and risks for any excess or

deficiency of premiums compared to health care expenses of Unity. The first measurement period under

the new provisions is February 1, 2013 to December 31, 2013. Based on results through June 30, 2014 and

2013, the Hospital recorded an estimated receivable amount of $3,726,000 and $1,500,000, respectively.




June 30, 2014 and 2013

29 (Continued)

e-Care of Wisconsin, LLC, was formed in May 2008 as a limited liability company. UHC is the sole

member of the LLC. The board of managers of e-Care of Wisconsin, LLC consists of three appointees

from the Hospital and two appointees each from UWMF and UHC; as such, the Hospital’s investment is

accounted for on the equity basis. Capital contributions to the LLC are funded 70% by the Hospital and

30% by UWMF as per resolution of the board of directors of UHC.

UHC was audited by other auditors as of December 31, 2013 and 2012, and for the years then ended. A

summary of certain financial data for UHC as of and for the years ended December 31, 201 and 2012 is as

follows (in thousands):

2013 2012

Total assets $ 199,943 164,877 Unrestricted net assets 72,738 68,544 Total revenue 651,197 497,363 Revenues over/(under) expenses 1,634 (517)

Wisconsin Therapies, Inc., a not-for-profit corporation in which the Hospital has a 50% interest, was

organized for the purpose of forming a limited liability company with Chartwell Midwest. Wisconsin

Therapies, Inc. is a holding company that has no assets, liabilities, or operations. The limited liability

company is called Chartwell Wisconsin Enterprises, LLC, and is the sole member in Chartwell Midwest

Wisconsin, LLC, and a single-member limited liability company providing tertiary home care, infusion

therapy and other home health services to acutely and chronically ill patients primarily in Wisconsin. The

Hospital’s investment in the company is adjusted for equity in undistributed earnings of Chartwell

Wisconsin Enterprises, LLC.

Wisconsin Dialysis, Inc. is a not-for-profit corporation, which is owned 45%, 45%, and 10% among the

Hospital, Meriter Hospital Inc., and UWMF, respectively. The investment is being accounted for by the

equity method. At June 30, 2014 and 2013, the Hospital had $200,000 and $56,000 in receivables,

respectively, from Wisconsin Dialysis, Inc.

The Hospital has a one-third membership interest in Madison Surgery Center Inc. The other members

include Meriter Hospital, Inc. and UWMF. The investment is being accounted for by the equity method.

Madison United Healthcare Linen, Ltd. provides laundry services to hospitals, long-term care facilities and

clinics. The Hospital is a 46.1% member, along with two other hospitals. The investment is being

accounted for by the equity method.

Madison Environmental Resourcing, Inc. provides waste treatment and disposal of solid waste material for

member organizations operating in the healthcare industry. The Hospital is a 40.9% member, together with

Meriter Hospital, Inc. and St. Mary’s Hospital. The investment is being accounted for by the equity

method.

Generations Fertility Care, Inc. is a joint venture fertility business owned equally by the Hospital, UWMF

and Meriter Hospital, Inc. The investment is being accounted for by the equity method.




June 30, 2014 and 2013

30 (Continued)

Investments in joint ventures as of June 30, 2014 and 2013 comprise of the following (in thousands):

2014 2013

University Health Care, Inc. $ 43,080 38,463 e-Care of Wisconsin, LLC 800 998 Wisconsin Therapies, Inc. 1,840 1,429 Wisconsin Dialysis, Inc. 4,483 3,490 Madison Surgery Center, Inc. 7,641 7,441 Madison United Healthcare Linen, Ltd. 4,112 4,137 Madison Environmental Resourcing, Inc. 745 692 Generations Fertility Care, Inc. 115 258 Madison Rehabilitation Hospital 58 —

$ 62,874 56,908

(5) Deposits and Investments

(a) Deposits

Custodial credit risk for deposits is the risk that in the event of a financial institution failure, the

Hospital’s deposits will not be returned. Deposits included in current cash and cash equivalents as of

June 30, 2014 and 2013 are presented in the table below (in thousands):

2014 2013

Bank balances:FDIC – Insured $ 559 559 Uninsured, collateralized, or collateralized by

securities held by the pledging institution or by itstrust department or agent in other than theHospital’s name 65,970 76,667

Petty cash 44 47

Total bank balances $ 66,573 77,273

Carrying amount $ 60,260 66,270

Additional amounts on deposit with the Hospital’s investment advisor for investment in

fixed-income securities included in noncurrent cash and investments are $8,966,000 and $16,901,000

as of June 30, 2014 and 2013, respectively. These amounts are uninsured and uncollateralized. Other

restricted deposits held with a trustee and included in noncurrent cash and investments are

$2,141,000 and $1,366,000 as of June 30, 2014 and 2013, respectively.

(b) Investments

The board of directors has authorized management to invest in debt and equity securities through the

following:




June 30, 2014 and 2013

31 (Continued)

Fixed-income securities – investments in U.S. Treasury bonds and notes, corporate bonds and other

government bonds managed by an investment advisor. Amounts are recorded at fair value based on

quoted market prices.

University of Wisconsin Foundation – Expendable Fund – pooled investments recorded at cost, plus

accrued earnings to date. The Foundation assumes the market risk for investments in this fund.

University of Wisconsin Foundation – Endowment Fund – pooled investments recorded using net

asset value as a practical expedient in estimating fair value.

Noncurrent cash and investments comprise at June 30, 2014 and 2013, as follows (in thousands):

2014 2013

Cash equivalents:Money market – investment advisor $ 8,966 16,901 Funds held with trustee money market fund 900 900 Funds held with trustee commercial paper 86,885 81,812 Other 52 43

Fixed income mutual fund 151,027 149,826 Fixed income securities 224,689 218,771 Fixed income securities held with trustee 37,667 124,436 Pooled investment funds on deposit with the University

of Wisconsin Foundation:Pooled Expendable Fund 162,614 167,114 Pooled Endowment Fund 129,978 112,761

Total $ 802,778 872,564

Investments held in the Pooled Endowment Fund at the Foundation consist of the following as of

June 30, 2014 and 2013:

2014 2013

Cash 3% 3%Fixed income 16 17Equity 58 54Private equity 21 23Real estate assets 2 3

100% 100%

The Hospital may redeem its investments held with the Foundation with a 30-day notice, subject to

certain fund availability restrictions.




June 30, 2014 and 2013

32 (Continued)

(c) Investment Risk Factors

There are many factors that can affect the value of investments. Some, such as custodial risk,

concentration of credit risk, and foreign currency risk may affect both equity and fixed-income

securities. Equity securities respond to factors such as economic conditions, individual company

earnings performance, and market liquidity, while fixed-income securities are particularly sensitive

to credit risks and changes in interest rates.

(d) Credit Risk

Credit risk is the risk that the Hospital will not recover its investments due to the failure of the

counterparty to fulfill its obligation. The Hospital does not have an investment policy over credit

risk. Investments in fixed-income securities are subject to credit risk as of June 30, 2014 and 2013 as

determined through a nationally recognized rating agency, Moody’s, are presented in the table below

(in thousands):

2014 2013

Aaa $ 108,393 110,713 Aa1 4,890 9,246 Aa2 6,446 24,134 Aa3 10,936 44,949 A1 19,167 21,904 A2 11,091 27,580 A3 14,986 18,111 Baa1 20,422 23,000 Baa2 30,421 29,794 Baa3 12,900 11,375 Ba1 3,317 2,935 Ba3 345 326 Not rated 19,042 19,140

Total $ 262,356 343,207

Investments in the pooled expendable fund and the pooled endowment fund are not subject to credit

risk as the Foundation is not rated.




June 30, 2014 and 2013

33 (Continued)

(e) Interest Rate Risk

Interest rate risk is the risk that the fair value of the Hospital’s investments will decrease as a result

of an increase in interest rates. Concentration of credit risk is the risk of loss attributed to the

magnitude of the Hospital’s investment in a single issuer or investment. The Hospital does not have

an investment policy over interest rate risk. Maturities related to the Hospital’s fixed-income

investments as of June 30, 2014 and 2013 are presented in the tables below (in thousands):

2014

Total < 1 year 2 – 5 years > 5 years

U.S. Treasury bonds and notes $ 115,420 20,459 66,208 28,753

Corporate bonds 145,217 35,184 72,911 37,122

Other government bonds 1,719 — 320 1,399

Total $ 262,356 55,643 139,439 67,274

2013

Total < 1 year 2 – 5 years > 5 years

U.S. Treasury bonds and notes $ 55,568 — 5,797 49,771

Corporate bonds 234,633 98,237 100,793 35,603

Other government bonds 53,006 10,823 31,092 11,091

Total $ 343,207 109,060 137,682 96,465

(6) Capital Assets

Capital asset additions, retirements, and balances for the year ended June 30, 2014 are as follows

(in thousands):

Balance, Additions Balance,

June 30, and June 30,

2013 transfers Retirements 2014

Capital assets not being depreciated:

Land $ 21,564 2,841 — 24,405

Land improvements 2,852 452 — 3,304

Construction in progress 35,015 91,831 — 126,846

Total 59,431 95,124 — 154,555




June 30, 2014 and 2013

34 (Continued)




Capital assets being depreciated:

Buildings and improvements $ 553,267 55,469 — 608,736

Equipment 317,204 53,592 (9,812) 360,984

Total 870,471 109,061 (9,812) 969,720

Less accumulated depreciation

and amortization for:

Buildings and improvements 261,115 22,079 — 283,194

Equipment 213,504 28,006 (9,546) 231,964

Total 474,619 50,085 (9,546) 515,158

Total capital assets

being

depreciated – net 395,852 58,976 (266) 454,562

Total capital assets $ 455,283 154,100 (266) 609,117

Construction in progress at June 30, 2014 consists principally of costs incurred for construction of a new

comprehensive acute and ambulatory care facility on the east side of Madison, operating room expansion,

and isolation fan upgrade. The construction projects are being financed through a combination of operating

funds, philanthropy and the 2013 bond financing (see note 7). During 2014, interest expense of

approximately $8,770,000, net of interest income of approximately $956,000, was capitalized.

Capital asset additions, retirements, and balances for the year ended June 30, 2013 are as follows

(in thousands):




Capital assets not being depreciated:

Land $ 17,064 4,500 — 21,564

Land improvements 2,277 575 — 2,852

Construction in progress 12,551 22,464 — 35,015

Total 31,892 27,539 — 59,431




June 30, 2014 and 2013

35 (Continued)




Capital assets being depreciated:

Buildings and improvements $ 523,402 29,988 (123) 553,267

Equipment 280,718 49,828 (13,342) 317,204

Total 804,120 79,816 (13,465) 870,471

Less accumulated depreciation

and amortization for:

Buildings and improvements 240,266 20,972 (123) 261,115

Equipment 203,179 23,149 (12,824) 213,504

Total 443,445 44,121 (12,947) 474,619

Total capital assets

being

depreciated – net 360,675 35,695 (518) 395,852

Total capital assets $ 392,567 63,234 (518) 455,283

Construction in progress at June 30, 2013 consists principally of costs incurred for construction of a new

comprehensive acute and ambulatory care facility on the east side of Madison, construction and equipping

of a two story addition to American Family Children’s Hospital for a pediatric ICU and NICU, build-out

and equipping of the Diagnostic and Therapy unit in American Family Children’s Hospital, equipping of a

new Autopsy and Pathology suite and fire alarm system upgrade. The construction projects are being

financed through a combination of operating funds, philanthropy and the 2013 bond financing (see note 7).

During 2013, interest expense of approximately $2,586,000, net of interest income of approximately

$(713,000), respectively, was capitalized.

Total remaining commitments on capital asset purchases and the renovation and construction projects

approximated $55,239,000 million at June 30, 2014.

The creation of the American Family Children’s Hospital represented the Hospital’s first major facility

funded in partnership with private donors. Building on a $10 million founding gift from American Family

Insurance Corp., a $41 million campaign for the construction of the new Children’s Hospital, began in

2003. Additional campaigns totaling $14.9 million have been subsequently initiated. As of June 30, 2014,

$51.9 million has been received and $1.5 million and $2.3 million, respectively, of net present value

pledges receivable were reflected in the financial statements as of June 30, 2014 and 2013, respectively.




June 30, 2014 and 2013

36 (Continued)

(7) Long-Term Debt

Changes in long-term debt for the years ended June 30, 2014 and 2013 are as follows (in thousands):

Balance, Payments Balance, Amounts

June 30, and June 30, due within

2013 Additions amortization 2014 one year

Amounts payable to the State

under capital lease

agreements for:

General Obligation Bonds $ 168 — 161 7 —

Refunding Bonds 1,054 — 512 542 282

Total payable to

the state 1,222 — 673 549 282

Hospital Revenue Bonds:

Series 2002B — — — — —

Series 2008A 16,430 — 1,525 14,905 1,775

Series 2009B 30,925 — 50 30,875 55

Series 2009C — — — — —

Series 2011A 56,245 — 2,100 54,145 2,200

Series 2011B 61,000 — — 61,000 —

Series 2013A 272,595 — 2,830 269,765 3,240

Capital Leases 8,332 — 1,996 6,336 2,216

Premium on long-term debt 20,216 — 679 19,537 680

Hospital Equipment Loan 16,824 — 5,891 10,933 5,956

Total long-term debt

including premium 483,789 — 15,744 468,045 16,404

Series 2000 Refunding deferred

outflows of resources $ (4,919) — (312) (4,607) —


outflows of resources (200) — (14) (186) —



Series 2002A Refunding deferred




Series 2008B Refunding deferred







June 30, 2014 and 2013

37 (Continued)






Series 2009C Refunding deferred


Total deferred loss

on debt refunding

in deferred

outflows of

resources $ (13,512) — (927) (12,585) —




Amounts payable to the State

under capital lease

agreements for:

General Obligation Bonds $ 192 — 24 168 25

Refunding Bonds 2,318 — 1,264 1,054 638

Total payable to

the state 2,510 — 1,288 1,222 663

Hospital Revenue Bonds:

Series 2002B 1,505 — 1,505 — —

Series 2008A 48,815 — 32,385 16,430 1,525

Series 2009B 54,825 — 23,900 30,925 50

Series 2009C 4,669 — 4,669 — —

Series 2011A 56,745 — 500 56,245 2,100

Series 2011B 61,000 — — 61,000 —

Series 2013A — 272,595 — 272,595 2,830

Capital Leases — 8,767 435 8,332 2,085

Premium on long-term debt 48 20,415 247 20,216 —

Hospital Equipment Loan 4,787 15,999 3,962 16,824 5,890

Total long-term debt

including premium $ 234,904 317,776 68,891 483,789 15,143












June 30, 2014 and 2013

38 (Continued)





outflows of resources $ (353) — (22) (331) —

Series 2008B Refunding deferred





outflows of resources — (6,259) (139) (6,120) —

Series 2009C Refunding deferred

outflows of resources — (175) (3) (172) —

Total deferred loss

on debt refunding

in deferred

outflows of

resources $ (7,657) (6,434) (579) (13,512) —

The amounts payable to the State under capital lease agreements represent portions of the respective

obligations for which repayment has been assigned to the Hospital in connection with the financing of the

Hospital’s facilities and equipment (note 1).

In October 2002, the Hospital issued $68,500,000 of Hospital Revenue Bonds, Series 2002 (Series 2002

Bonds) consisting of $55,600,000 Series 2002A Short-term Adjustable Securities and $12,900,000

Series 2002B Fixed Interest Rate Bonds. The bond proceeds were designated to finance-qualified capital

projects. In March 2009, the Hospital refunded $55,600,000 of the outstanding Series 2002A bonds with

Variable Rate Demand Revenue Bonds, Series 2009A. The refunding of the Series 2002A bonds resulted

in the recognition of a deferred outflow of resources of $641,000. Prior to the adoption of GASB Statement

No. 63 and No. 65, the deferred outflow of resources was classified as a deferred loss. With the early

adoption of GASB Statement No. 63 and 65, the deferred loss, which was an offset to long-term debt, has

been reclassified to deferred outflows of resources on the statement of net position. Principal payments on

the remaining Series 2002B Bonds was $1,505,000 paid in April 2013. Interest rates for the Series 2002B

Bonds range from 5.25% to 5.50% and payable semiannually on April 1 and October 1 of each year. The

effective annual interest rate of the Series 2002B Bonds was 5.50% in 2013.

In September 2005, the Hospital issued $59,770,000 of Variable Rate Demand Hospital Revenue Bonds,

Series 2005 (Series 2005 Bonds). The bond proceeds were designated to refund a portion of the then

outstanding Series 2000 Bonds. As a result of advanced refunding, the Hospital recognized a deferred loss

of $7,339,000, which is being amortized to interest expense over the term of the debt. There are no

amounts outstanding on the defeased bonds at June 30, 2014 and 2013. In March 2009, the Hospital

refunded $58,095,000 of the outstanding Series 2005 bonds with Variable Rate Demand Hospital Revenue

Bonds, Series 2009B and transferred the April 2009 principal payment of $495,000 into escrow. The

refunding of the Series 2005 Bonds resulted in the recognition of a deferred outflow of resources of

$423,000.




June 30, 2014 and 2013

39 (Continued)

In May 2008, the Hospital issued $50,375,000 of Fixed Rate Bonds, Series 2008A (Series 2008A Bonds)

through a private placement. The bond proceeds were used to refund $50,000,000 of Variable Rate

Demand Hospital Revenue Bonds, Series 1997, resulting in the recognition of a deferred outflow of

resources of $271,000, which is being amortized to interest expense over the term of the debt. Principal

payments on the remaining Series 2008A Bonds, ranging from $1,010,000 to $2,020,000, are due annually

from April 2015 through April 2023. Interest is payable semiannually. The effective interest rate of the

Series 2008A Bonds was 5.00% in 2014 and 2013. In March 2013, the Hospital refunded $31,760,000 of

the outstanding Series 2008A Bonds with Fixed Rate Demand Hospital Revenue Bonds, Series 2013A.

The refunding of the Series 2008A Bonds resulted in the recognition of a deferred outflow of resources of

$6,259,000.

In June 2008, the Hospital issued $61,000,000 of Variable Rate Demand Revenue Refunding Bonds,

Series 2008B Bonds, secured by an irrevocable transferable direct pay letter of credit issued by a

commercial bank. The bonds proceeds were used to refund $60,000,000 of Hospital Revenue Bonds

consisting of Short-term Adjustable Rate Securities, Series 2004, resulting in the recognition of a deferred

outflow of resources of $465,000, which is being amortized to interest expense over the term of the debt. In

May 2011, the Hospital refunded $61,000,000 of the outstanding Series 2008B bonds with Revenue

Refunding Bonds, Series 2011B. The refunding of the Series 2008B bonds resulted in the recognition of a

deferred outflow of resources of $474,000.

In September 2008, the Hospital entered into an equipment financing agreement with GE Government

Finance, Inc in the amount of $9,283,424. Principal and interest payments are made monthly commencing

on November 1, 2008, for seven years. The effective annual interest rate was 4.40% in 2014 and 2013.

In March 2009, the Hospital issued $57,070,000 of Variable Rate Demand Revenue Refunding Bonds,

Series 2009A (Series 2009A Bonds), secured by an irrevocable transferable direct pay letter of credit

issued by a commercial bank. The bond proceeds were used to refund $55,600,000 of the outstanding

Hospital Revenue Bonds consisting of Short-Term Adjustable Rate Securities, Series 2002A. In May 2011,

the Hospital refunded the outstanding $57,070,000 of the Series 2009A bonds with Revenue Refunding

Bonds, Series 2011A and the balance of the Series 2009A Interest Fund. The refunding of the

Series 2009A bonds resulted in the recognition of a deferred outflow of resources of $488,000.

In March 2009, the Hospital also issued $59,345,000 of Variable Rate Demand Revenue Refunding Bonds,

Series 2009B (Series 2009B Bonds). The bond proceeds were used to refund $58,095,000 of Variable Rate

Demand Revenue Refunding Bonds, Series 2005. Principal payments on the remaining Series 2009B

Bonds, ranging from $50,000 to $8,195,000, are due annually from April 2015 through April 2029.

Series 2009B Bonds bear interest at a weekly rate determined by a remarketing agent. Interest is payable

monthly. In 2014 and 2013, the effective annual interest rate was 0.10%. In March 2013, the Hospital

refunded $21,770,000 of the outstanding Series 2009B Bonds with Fixed Rate Demand Hospital Revenue

Bonds, Series 2013A.

The Series 2009B Bonds are secured by an irrevocable transferable direct pay letter of credit issued by a

commercial bank. The letter-of-credit-agreement had a stated expiration date of March 2014. On July 31,

2013, it was extended through March 2019. In the event of a draw under the letter of credit, it does not

require any principal payments within the first year; interest payments are due monthly. Outstanding




June 30, 2014 and 2013

40 (Continued)

principal payments under the letter of credit would revert to a term out loan after the first year. Any

obligations under the term out loans are repayable in equal quarterly installments based on a four-year

straight-line amortization commencing on the 367th day after the draw with final payments of the

outstanding balances on the earliest to occur of: (a) the date on which the letter of credit is replaced or

substituted; (b) five (5) years following the date of the draw preceding such Term Out Loan; (c) the date

the bonds are successfully remarketed; or (d) the date on which all amounts due have been accelerated

pursuant to the letters-of-credit. The letter-of-credit agreements include a material adverse effect clause.

The agreements provide specific details as to what constitutes a material adverse effect and that a material

adverse effect could constitute an event of default under the letter of credit. At June 30, 2014 and 2013,

there were no amounts outstanding under the letter of credit.

In June 2009, the Hospital issued $5,300,000 of Fixed Rate Hospital Revenue Bonds, Series 2009C

(Series 2009C Bonds) through a private placement. The bond proceeds were designated to finance

qualified capital projects. The effective annual interest rate on the Series 2009C Bonds was 1.20% in 2014

and 4.30% in 2013. In March 2013, the Hospital refunded all of the outstanding Series 2009C Bonds with

Fixed Rate Demand Hospital Revenue Bonds, Series 2013A. The refunding of the Series 2009C Bonds

resulted in the recognition of a deferred outflow of resources of $192,000.

In May 2011, the Hospital issued $56,745,000 of Revenue Refunding Bonds, Series 2011A to a

commercial bank in the form of a direct bond purchase agreement. The bond proceeds were used to refund

$57,070,000 of Variable Rate Demand Revenue Bonds, Series 2009A. Principal payments on the

remaining Series 2011A Bonds, ranging from $2,200,000 to $3,900,000, are due annually from April 2015

through April 2032. Series 2011A bonds bear interest at 74% of LIBOR, plus 1.04%, payable monthly. In

2014 and 2013, the effective interest rate was 1.20%.

In May 2011, the Hospital also issued $61,000,000 of Revenue Refunding Bonds, Series 2011B to a

commercial bank in the form of a direct bond purchase agreement. The bond proceeds were used to refund

$61,000,000 of Variable Rate Demand Revenue Bonds, Series 2008B. Principal payments on the

remaining Series 2011B Bonds, ranging from $9,950,000 to $15,275,000, are due annually in April 2030

through April 2034. Series 2011B bonds bear interest at 74% of LIBOR, plus 1.04%, payable monthly. The

effective interest rate was 1.20% in 2014 and 1.30% in 2013. The 2011B bond documents include a

material adverse effect clause. The bond documents provide specific details as to what constitutes a

material adverse effect and that a material adverse effect could constitute an event of default.

In March 2013, the Hospital issued $272,595,000 of Fixed Rate Hospital Revenue Bonds, Series 2013A.

The bond proceeds are designated to finance qualified capital projects and to refund a portion of the

outstanding Series 2008A Bonds and Series 2009B Bonds, the remainder of the outstanding Series 2009C

Bonds, and a partial termination of the Series 2009B interest swap agreement. The Series 2013A Bonds

were sold at a premium totaling $20,415,000. The premium will be amortized to interest expense on a

straight-line basis over the life of the bonds which approximates the interest yield. Principal payments on

the Series 2013A Bonds, ranging from $1,240,000 to $24,955,000 are due annually beginning in

April 2014 and continuing through April 2043. Interest is payable semi-annually at rates ranging from

3.00% to 5.00%. The effective interest rate was 4.00% in 2014 and 3.90% in 2013.




June 30, 2014 and 2013

41 (Continued)

In March 2013, the Hospital entered into an interest-free equipment financing agreement with GE Capital

Corporation in the amount of $15,998,641. Principal payments are due annually commencing in April 2013

for 3 years.

The Hospital is obligated under capital leases covering equipment that expire at various dates during the

next five years. At June 30, 2014, the Hospital had $8,707,000 of gross amount of equipment recorded and

related accumulated depreciation of $2,384,000, recorded under capital leases.

The Series 2008A Bonds, Series 2009B Bonds, Series 2011A Bonds, Series 2011B Bonds, and

Series 2013A Bonds are collateralized by a security interest in substantially all of the Hospital’s revenue.

The borrowing agreements contain various covenants and restrictions, including compliance with the terms

and conditions of a Lease Agreement (note 1) and provisions limiting the amount of additional

indebtedness that may be incurred. Management believes that the Hospital is in compliance with all debt

covenants and has not incurred a material adverse effect as defined at June 30, 2014 and 2013.

State of Wisconsin statutes require the Hospital to obtain approval of additional bond issuance from its

board of directors, maintain an unenhanced bond rating in the category of “A” or better from Standard &

Poor’s Corporation and Moody’s Investor Service, Inc., and notify the State Joint Committee on Finance.

The Hospital’s current ratings from Standard &Poor’s and Moody’s are A+ and Aa3, respectively.

In October 2002, the Hospital entered into an interest rate swap in order to convert a portion of the

Series 2002A Short-term Adjustable Rate Securities to fixed rates. The notional amount of this swap

agreement was $18,750,000 and $20,850,000 at June 30, 2014 and 2013, respectively, and matures on

April 1, 2022. This swap had been applied to the Series 2009A with the refunding of the Series 2002A

bonds and is now applied to the Series 2011A bonds with the refunding of the Series 2009A bonds. The

terms of the swap agreement are for the Hospital to pay the counterparty a fixed rate of 3.85% per annum,

payable semiannually, and the Hospital to receive a floating rate of 70% of one-month London InterBank

Offered Rate (LIBOR) per annum, payable monthly. The effective interest rate received by the Hospital

was .10% in 2014 and .20% in 2013. The fair value of the swap agreement was $(2,096,005) and

$(2,539,626) at June 30, 2014 and 2013, respectively.

In November 2004, the Hospital entered into an interest rate swap in order to convert a portion of the

Series 1997 Variable Rate Demand Bonds to fixed rates. This swap had been applied to the 2008B bonds

with the refunding of Series 1997 bonds and is now applied to the Series 2011B bonds with the refunding

of Series 2008B bonds. The notional amount of this swap agreement was $22,250,000 and $24,150,000 at

June 30, 2014 and 2013, respectively, and matures on April 1, 2021. The terms of the swap agreement are

for the Hospital to pay the counterparty a fixed rate of 3.45% per annum, payable semiannually, and the

Hospital to receive a floating rate of 70% of one-month LIBOR per annum, payable monthly. The effective

interest rate received by the Hospital was 0.10% in 2014 and 0.20% in 2013. The fair value of the swap

agreement was $(2,064,000) and $(2,508,391) at June 30, 2014 and 2013, respectively.

In September 2005, the Hospital entered into an interest rate swap in order to convert the Series 2005

Variable Rate Demand Hospital Revenue Bonds to fixed rate. This swap has been applied to the

Series 2009B with the refunding of the Series 2005 Bonds. In March 2013, a portion of the swap in the

amount of $21,770,000 was unwound in connection with the Series 2013A financing. The notional amount




June 30, 2014 and 2013

42 (Continued)

of the swap agreement was $29,860,000 at June 30, 2014 and 2013, and matures on April 1, 2029. The

Hospital paid $2,629,336 in connection with the partial termination. The terms of the swap agreement are

for the Hospital to pay the counterparty a fixed rate of 3.31% per annum, payable monthly, and the

Hospital to receive a floating rate of 58.3% of one-month LIBOR per annum plus 0.36%, payable monthly.

In 2014 and 2013, the effective interest rate received by the Hospital was .50%. The fair value of the swap

agreement was $(4,546,389) and $(4,346,418) at June 30, 2014 and 2013, respectively.

The fair values of the swap agreements were estimated considering the projected cash flows associated

with the swaps, and the fair values are reflected in other long-term liabilities on the financial statements.

In 2012, the Hospital determined that the derivative instruments associated with the Series 2011A and

Series 2011B bonds have been effective since inception, the year the Hospital adopted Statement No. 53.

The changes in fair market value of the effective swaps of $(888,000) and $(2,013,000) for the years ended

June 30, 2014 and 2013, respectively, are reflected as adjustments to deferred outflows of resources.

There are collateral posting provisions on the swap agreement. The collateral amount required is

determined based on the fair value of the swap, less the applicable threshold of $7,000,000 at the

Hospital’s current rating. Collateral valuations are performed daily, based on the official market closing

curve. While the counterparty holds the collateral, the funds will earn the overnight Federal Funds interest

rate, payable monthly. No collateral was required as of June 30, 2014 and 2013.

The Hospital will be exposed to variable rates if the counterparty to the swap defaults or if the swaps are

terminated. The swap agreements include bilateral additional termination event provisions. Under the

provisions, either party has the option, but not the obligation, to terminate the swap transaction if the other

party gets downgraded below certain thresholds. Neither the Hospital nor the counterparties have been

downgraded below these thresholds at June 30, 2014 and 2013. The swaps expose the Hospital to basis risk

should the relationship between LIBOR and variable rate converge, changing the synthetic rate on the

bonds. As of June 30, 2014 and 2013, the Hospital was not exposed to credit risk because each of the

swaps had a negative fair value. However, should interest rates change and any one of the fair value of the

swaps become positive, the Hospital would be exposed to credit risk in the amount of the swap’s fair value.




June 30, 2014 and 2013

43 (Continued)

Aggregate scheduled principal and interest repayments on long-term debt as stated under the actual debt

terms, including the effect of the swaps based on the effective interest rate at June 30, 2014 are as follows

(in thousands):

Interest rate

Year ending June 30 Principal Interest swap – net Total

2015 $ 15,724 14,328 2,299 32,351

2016 14,459 13,983 2,136 30,578

2017 9,747 13,692 1,960 25,399

2018 10,007 13,378 1,771 25,156

2019 9,267 13,022 1,575 23,864

2020 – 2024 52,903 59,446 5,151 117,500

2025 – 2029 65,950 50,439 2,885 119,274

2030 – 2034 79,815 45,415 — 125,230

2035 – 2039 96,655 32,702 — 129,357

2040 – 2044 93,981 9,504 — 103,485

Subtotal 448,508 265,909 17,777 732,194

Premium on long-term debt 19,537 — — 19,537

Total debt $ 468,045 265,909 17,777 751,731

Should a situation arise in which the Series 2009B variable rate bonds were put back to the Hospital and

the Hospital made a draw on the commercial bank letter of credit, the timing of scheduled principal

payments on long-term debt would change as depicted below (in thousands):

2015 $ 15,724 2016 22,114 2017 17,392 2018 17,652 2019 16,912 2020 – 2024 50,408 2025 – 2029 37,855 2030 – 2034 79,815 2035 – 2039 96,655 2040 – 2044 93,981

Total $ 448,508

(8) Net Patient Service Revenue

The Hospital has agreements with third-party payors that provide for reimbursement at amounts different

from the Hospital’s established rates. Contractual adjustments under third-party reimbursement programs

represent the difference between the Hospital’s established rates for services and amounts reimbursed by

third-party payors. A summary of the basis of reimbursements with major third-party payors is as follows:




June 30, 2014 and 2013

44 (Continued)

(a) Medicare

Inpatient acute care services rendered to Medicare beneficiaries and defined capital costs are paid at

prospectively determined rates per discharge. These rates vary according to a patient classification

system that is based on clinical, diagnostic, and other factors. Outpatient services are reimbursed

based on prospectively determined rates with separate payment classifications established for each

distinct service rendered within the encounter. Inpatient nonacute services, medical education, and

certain organ acquisition costs related to Medicare beneficiaries are paid based upon

cost-reimbursement methods, established fee screens, or a combination thereof. The Hospital is

reimbursed for cost-reimbursement items at a tentative rate with final settlement determined after

submission of annual cost reports by the Hospital and audits by the Medicare fiscal intermediary.

The Hospital’s Medicare cost reports have been audited by the Medicare fiscal intermediary through

June 30, 2010. The estimated receivables and payables to Medicare included in the financial

statements include those cost reports that are subject to audit by the Medicare fiscal intermediary.

Net patient service revenue for the years ended June 30, 2014 and 2013 included approximately

$7,422,000 and $4,704,000, respectively, of retrospectively determined settlements from third-party

payors and changes in estimates.

(b) Medicaid

Inpatient services rendered to Medicaid beneficiaries are reimbursed similar to the method for

Medicare inpatient acute care services. Differences from the Medicare method pertain to

reimbursements for organ transplants, capital costs, and medical education costs. Medicaid

outpatient services are paid on a predetermined rate per visit.

Laws and regulations governing Medicare and Medicaid programs are extremely complex and

subject to interpretation. As a result, there is at least a reasonable possibility that recorded estimates

will change by a material amount in the near term. The impact of any change in estimates is recorded

in the year the change is determined. In management’s opinion, the ultimate disposition of these

uncertainties will not have a material adverse effect on the financial position of the Hospital or

results of operations.

(c) Other

The Hospital has also entered into reimbursement agreements with certain commercial insurance

carriers, health maintenance organizations, and preferred provider organizations. The basis for

reimbursements under these agreements includes capitation, prospectively determined rates per

discharge, discounts from established rates, and prospectively determined per diem rates.

Capitation revenue with third-party payors comprised approximately 11.5% and 10.0% of net patient

service revenue during the years ended June 30, 2014 and 2013, respectively.




June 30, 2014 and 2013

45 (Continued)

The Hospital grants credit without collateral to its patients, most of whom are local residents and are

insured under third-party payor agreements. The mix of net patient service revenue and net patient

accounts receivable at June 30, 2014 and 2013 is summarized as follows:

2014 2013

Net patient service revenue:Medicare 25.1% 26.0%Medicaid 7.6 7.0Managed care 52.8 52.6Indemnity 4.1 4.3Private pay and other 10.4 10.1

100.0% 100.0%

Net patient accounts receivable:Medicare 24.0% 25.4%Medicaid 9.2 9.1Managed care 39.6 41.7Indemnity 12.2 8.7Other 15.0 15.1

100.0% 100.0%

(9) Charity Care

The Hospital maintains records to identify and monitor the level of charity care it provides. These records

include the amount of charges foregone for services and supplies furnished under its charity care policy.

The approximate level of charity care provided (based on charges) during the years ended June 30, 2014

and 2013 was $61,919,000 and $60,866,000, respectively.

(10) Pension Plan

Virtually all Hospital employees participate in the Wisconsin Retirement System (WRS), a cost sharing,

multiple employer, defined-benefit public employee retirement system governed by Chapter 40 of the

Wisconsin Statutes. All permanent employees expected to work over 600 hours per year are eligible to

participate in the WRS. The 2011 Wisconsin Act 10, which was implemented in August 2011, contained

provisions that affected the retirement program. The WRS employee contribution rate for general

employees was changed from 5.0% to 5.8% of their salary and it prohibited employers from paying the

WRS employee required contribution for all WRS employees who did not have a collective bargaining

agreement in place prior to the effective date of Act 10. The WRS employee contribution rate was changed

to 6.65% effective January 2013 and 7.00% in January 2014. Prior to Act 10, the Hospital employees

participating in WRS were categorized as either Hospital Board or Hospital Authority employees. Covered

general employees were required by statute to contribute 5.0% of their salary to the plan; however, the

Hospital funded these contributions to the plan on behalf of the employees. The Hospital was required to

contribute the remaining amounts necessary to pay the projected cost of defined future benefits related to

current service on a pay-as-you-go basis, as determined from the State of Wisconsin Department of




June 30, 2014 and 2013

46 (Continued)

Employee Trust Funds. Act 10 also eliminated the separate category of Board employees and all are now

Hospital Authority employees.

The payroll for employees covered by WRS for the year ended June 30, 2014 was $433,253,000; the

employer’s total payroll was $452,395,000. The total required contributions, paid by both the employer

and the employees, for the year ended June 30, 2014 were $70,866,000. The payroll for employees covered

by WRS for the year ended June 30, 2013, was $408,353,000; the employer’s total payroll was

$426,967,000. The total required contributions, paid by both the employer and the employees, for the year

ended June 30, 2013 were $61,289,000.

Employees who retire at or after age 65 are entitled to receive a retirement benefit. Employees may retire at

age 55 and receive reduced benefits. Retirement benefits are calculated as 1.6% of final average earnings

for each year of creditable service. Final average earnings is the average of the employee’s three highest

years’ earnings. Employees terminating covered employment before becoming eligible for a retirement

benefit may withdraw their contributions and, by doing so, forfeit all rights to any subsequent benefit. For

employees beginning participation on or after January 1, 1990, and no longer actively employed on or after

April 24, 1998, creditable service in each of five years is required for eligibility for a retirement annuity.

Participants employed prior to 1990 and on or after April 24, 1998 are immediately vested.

Although projected benefits for current service are funded on a pay-as-you go basis, the Hospital has

recorded liabilities related to the unfunded prior service costs and sick leave conversion credits.

The Hospital is required to make periodic payments to the WRS in respect of the employer’s share of the

unfunded prior service liability and sick leave conversion credit of the WRS related to prior service costs.

The statutorily required payments are based upon a percentage of covered wages. This percentage was

designed to amortize the unfunded liability over 40 years, with 19 years remaining in 2014. The Hospital’s

total obligation is increased each year by an amount of interest, currently equal to 7.2% of the amount of

the unfunded liability. The Hospital’s liability for unfunded prior service liability and sick leave conversion

credit, payable to WRS, was $17,764,000 and $22,204,000, as of June 30, 2014 and 2013, respectively.

For employees that were classified as Hospital Board employees prior to the enactment of Act 10, the

Hospital’s liability for unfunded prior service and sick leave is payable to the State Department of

Administration. In December 2003, the State Department of Administration issued annual appropriation

bonds and used the proceeds to retire the State’s portion (including the then Hospital Board employees) of

the unfunded pension liability with WRS. The Hospital is required to reimburse the State for the Hospital’s

pro rata share of the associated debt service. The Hospital has recognized a liability of $49,319,000 as of

June 30, 2014, of which $2,387,000 is payable in 2014 and is recorded in accrued expenses and

$46,932,000 is recorded in pension-related liabilities, payable in annual principal and interest payments to

the State over approximately 18 years. In 2014, the liability was decreased by $1.1 million based on

updated information provided by the State based on its methodology for allocating responsibility for

ongoing debt service to State entities and is recorded as miscellaneous nonoperating expense.

The Hospital’s liability was $50,371,000 as of June 30, 2013, of which $983,000 was payable in 2014 and

is recorded in accrued expenses and $49,388,000 was recorded in pension-related liabilities.




June 30, 2014 and 2013

47 (Continued)

The total pension-related liabilities for the Hospital as of June 30, 2014 and 2013 total $67,083,000 and

$72,575,000, respectively, including current portion. The liability is made up of the amounts payable to

both the State and the WRS, as discussed above. Copies of the separately issued WRS financial report, that

includes financial statements and required supplementary information, may be obtained by writing to

Department of Employee Trust Funds, 801 West Badger Road, P.O. Box 7931, Madison, Wisconsin

53707-7931.

(11) Retiree Health Insurance Plan

(a) Plan Description

The Hospital is a part of the State’s Health Insurance Program, which is an employer-sponsored

program offering group medical coverage to eligible employees and retirees of the State and

participating local government employers. Created under Chapter 40 of the Wisconsin State Statutes,

the State Department of Employee Trust Funds and the Group Insurance Board have program

administration and oversight responsibilities under Wis. Stat. Sections 15.165(2) and 40.03(6).

Under this agent multiple-employer plan, retired employees of the Hospital are allowed to pay the

same healthcare premium as active employees, creating an implicit rate subsidy for retirees. This

implicit rate subsidy, which is calculated to cover pre-age 65 retirees (since at age 65, retirees are

required to enroll in Medicare when eligible), is treated as an other postemployment benefit (OPEB).

Retirees over age 65 may purchase Medicare supplemental and prescription benefit coverage through

the plan.

The Department of Employee Trust funds issues a publicly available financial report that includes

financial statements and required supplementary information for the plan. That report may be

obtained by writing to Department of Employee Trust Funds, 801 West Badger Road, PO Box 7931,

Madison, Wisconsin 53707-7931.

(b) Funding Policy

The health insurance plan is currently on a “pay-as-you-go-basis.” GASB Statement No. 45 does not

address funding of the OPEB obligation and the Hospital does not intend to fund it. Current

employees are not required to contribute to the retiree healthcare plan. Retirees electing to participate

in the plan pay 100% of premiums directly to the plan either out-of-pocket or with their accumulated

sick leave conversion credits.




June 30, 2014 and 2013

48 (Continued)

(c) Annual OPEB Cost

The Hospital’s 2014 and 2013 OPEB cost (expense), dollar amount of contributions, and

components of OPEB cost were as follows (in thousands):

2014 2013

Annual Required Contribution (ARC) $ 5,903 5,298 Interest on the net OPEB obligation 1,039 881 ARC adjustment with interest (1,231) (995)

Annual OPEB cost 5,711 5,184

Employer contribution implicit rate adjustment (1,380) (1,442)

Change in the net OPEB obligation 4,331 3,742

Net OPEB obligation beginning balance 24,460 20,718

Net OPEB obligation ending balance $ 28,791 24,460

The Hospital’s annual OPEB cost, percentage of annual OPEB cost contributed to the plan, and the

net OPEB obligation are as follows:

Annual Percent of NetOPEB annual OPEB OPEB

Fiscal year ended cost contributed obligation

6/30/2014 $ 5,711 24.1% $ 28,791 6/30/2013 5,184 27.8 24,460 6/30/2012 5,507 18.3 20,718

(d) Funded Status and Funding Progress

As permitted by GASB 45, the Hospital obtains biannual actuarial valuations of its plan.

The Hospital does not fund the plan, and consequently the funded status was $0 as of July 1, 2013

(the most recent actuarial valuation).

2014

Actuarial accrued liability (AAL) $ 37,332 Actuarial value of plan assets —

Unfunded actuarial accrued liability (UAAL) $ 37,332

Funded ratio (actuarial value of plan assets/AAL) —%Covered payroll (active plan members) $ 433,253




June 30, 2014 and 2013

49 (Continued)

Actuarial valuations of an ongoing plan involve estimates of the value of reported amounts and

assumptions about the probability of occurrence of events far into the future. Examples include

assumptions about future employment, mortality, and the healthcare cost trend. Amounts determined

regarding the funded status of the plan and the annual required contributions of the employer are

subject to continual revision as actual results are compared with past expectations and new estimates

are made about the future. The schedule of funding progress, presented as required supplementary

information following the notes to the financial statements, presents the transition year trend

information that shows whether the actuarial value of plan assets is increasing or decreasing over

time relative to the actuarial accrued liabilities for benefits.

(e) Actuarial Methods and Assumptions

Projections of benefits for financial reporting purposes are based on the substantive plan (the plan as

understood by the employer and plan members) and include the types of benefits provided at the

time of the valuation and the historical pattern of sharing the benefit costs between employer and

plan members to that point. In the actuarial valuation for fiscal year 2013-2014, the projected unit

credit method was used. Actuarial calculations reflect a long-term perspective. The actuarial

assumptions included a 4.25% discount rate and an annual healthcare cost trend rate of 7.5% for

2014-2015, 7.0% for 2016-2017 and 6.5% for 2018-2019, reduced by decrements to an ultimate rate

of 5.5% after 8 years. The unfunded actuarial accrued liability is being amortized as a 30-year level

percentage of pay amortization periods on a closed basis for the initial UAAL. The remaining

amortization period was 24 years at June 30, 2014.

(12) Malpractice Insurance

The Hospital has occurrence-based coverage for claims incurred July 1, 2002 through June 30, 2003, and

has claims-made or tail coverage under various policies for claims made before and after that period.

Losses in excess of the professional liability insurance are fully covered through the Hospital’s mandatory

participation in the Injured Patient and Families Compensation Fund of the State of Wisconsin. The Injured

Patient and Families Compensation Fund has coverage limits of $1,000,000 per claim and $3,000,000 in

aggregate per year and pays that portion of a medical malpractice claim, which is in excess of the legal

primary insurance limit prescribed under law, or the maximum liability limit for which the health provider

is insured, whichever limit is greater. The Fund may pay claims in excess of the primary limits if the Fund

is named in legal action. Most qualified health care providers permanently practicing or operating in the

State of Wisconsin are required to pay, unless exempt, Injured Patient and Families Compensation Fund

operating fees. Risk of loss is retained by the fund. Noneconomic damages are capped in the State of

Wisconsin. The Hospital has recorded in the financial statements its best estimate for the ultimate cost

discounted at 3% of professional liability claims, including incurred but not reported claims.




June 30, 2014 and 2013

50 (Continued)

(13) Liabilities for Workers’ Compensation Claims

A reconciliation of changes in the aggregate liabilities for workers’ compensation claims for the years

ended June 30, 2014 and 2013 is as follows (in thousands):

Amount of Amount ofclaims Incurred claims

liabilities claims liabilitiesbeginning and changes Payments end of

of year in estimates on claims year

2014 $ 8,900 4,247 (3,514) 9,633 2013 9,665 1,757 (2,522) 8,900

Workers’ compensation claim expense is included with employee benefits expense in the statements of

revenues, expenses, and changes in net position and accrued expenses in the statements of net position.

(14) Commitments and Contingencies

(a) Leases

The Hospital leases buildings, equipment, and helicopter transport services under operating leases.

Rental expense for cancelable and noncancelable operating leases was approximately $17,784,000

and $15,938,000 for 2014 and 2013, respectively, and is included in other expenses.

Future minimum payments under noncancelable operating leases and license agreements (with initial

or remaining lease terms in excess of one year) and future minimum capital lease payments as of

June 30, 2014, are as follows (in thousands):

Operating Capitalleases leases

2015 $ 14,300 2,739 2016 12,020 2,280 2017 9,023 1,673 2018 7,132 1,532 2019 6,665 — 2020–2024 13,455 — 2025–2029 8,506 —

Total future minimum lease payments $ 71,101 8,224




June 30, 2014 and 2013

51 (Continued)

Operating Capitalleases leases

Less amount representing interest $ — 1,888

Present value of future minimum leasepayments 71,101 6,336

Less current portion of obligations under capital leases — 2,216

Obligations under capital leases, excludingcurrent portion $ 71,101 4,120

(b) Regulatory Investigations

The U.S. Department of Justice and other federal agencies are increasing resources dedicated to

regulatory investigation and compliance audits of health care providers. The Hospital is subject to

these regulatory efforts. Management is currently unaware of any regulatory matters, which will

have a material adverse effect on the Hospital’s financial position or results of operations.

(c) Other

The Hospital is subject to various legal proceedings and claims, which are incidental to its normal

business activities. In the opinion of management, the amount of ultimate liability with respect to

these actions will not have a material adverse effect on the Hospital’s financial position or results of

operations.

(15) Noncurrent Liabilities

The activity in the Hospital’s noncurrent liabilities for the years ended June 30, 2014 and 2013 is set forth

below (amounts in thousands):

Balance at Balance at

June 30, 2013 Increases Decreases June 30, 2014

Long-term debt, less currentinstallments $ 468,646 — 17,005 451,641

Net OPEB obligation 24,460 4,331 — 28,791 Pension-related liabilities 71,591 — 6,895 64,696 Other long-term liabilities

(interest rate swaps) 9,394 — 688 8,706




June 30, 2014 and 2013

52

Balance at Balance at

June 30, 2012 Increases Decreases June 30, 2013

Long-term debt, less currentinstallments $ 226,714 317,776 75,844 468,646

Net OPEB obligation 20,718 3,742 — 24,460 Pension-related liabilities 75,838 — 4,247 71,591 Other long-term liabilities

(interest rate swaps) 16,906 — 7,512 9,394

REQUIRED SUPPLEMENTARY INFORMATION


Schedule of Plan Funding Progress

June 30, 2014

(In thousands)

Unfundedactuarial UAAL as a

Actuarial Actuarial Actuarial accrued percentage ofvaluation value of accrued liability Funded Covered covered

date assets liability (AAL) (UAAL) ratio payroll payroll

7/1/2009 $ — 39,246 39,246 —% $ 346,287 11.3%7/1/2011 — 35,639 35,639 — 387,110 9.27/1/2013 — 37,332 37,332 — 433,253 8.6

See accompanying independent auditors’ report.

53

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